Comparing growth: PPPs, negative growth and recession

Comparing over time and between countries

Use real, per capita figures. Growth rates tell you how fast an economy is expanding, not how rich it is: a poor country growing at 7% may still have much lower GDP per capita than a rich country growing at 1%. Watch for the difference between a level and a rate of change: a fall in the growth rate from 4% to 2% means GDP is still rising, only more slowly.

Purchasing power parities

Converting GDP at market exchange rates is misleading because prices differ between countries: $1 buys more haircuts and food in a low-cost country.

A PPP exchange rate is the rate at which the same basket of goods costs the same in both countries. GDP converted at PPP rates (in 'international dollars') compares real purchasing power.

GDP at PPP = GDP in local currency / PPP rate (local currency per $).

Negative growth and recession

• Positive growth: real GDP rising.
• Negative growth: real GDP falling.
• A recession is commonly defined as two consecutive quarters of negative economic growth.

In a recession, unemployment usually rises, firms' profits and investment fall, tax revenue falls and spending on benefits rises.

Worked example

Country K's GDP per capita is 36000 kips. The market exchange rate is 18 kips per $ and the PPP rate is 12 kips per $. Compare the two dollar values.

1. At the market rate: 36000 / 18 = $2,000
2. At PPP: 36000 / 12 = $3,000
3. Prices in K are low, so each kip buys more than the market rate suggests.

Answer: About $2,000 at market rates but $3,000 at PPP: living standards are higher than the market-rate figure suggests.

Check yourself

1. GDP per capita in Country M is 240,000 pesos. The PPP rate is 16 pesos per international $. Find GDP per capita at PPP in $.
   Show answer

   $15000. 240,000 / 16 = $15,000.

2. Using the same GDP per capita of 240,000 pesos, the market rate is 24 pesos per $. Find GDP per capita at market exchange rates in $.
   Show answer

   $10000. 240,000 / 24 = $10,000, lower than at PPP because prices in M are relatively low.

3. Quarterly real GDP growth rates are: +0.4%, -0.2%, +0.1%, -0.3%, -0.5%. When does a recession begin, using the usual definition?
   • At the second quarter
   • At the first quarter
   • There is no recession
   • At the fourth quarter shown, as the fourth and fifth quarters are each negative
   Show answer

   At the fourth quarter shown, as the fourth and fifth quarters are each negative. Only the fourth and fifth quarters form two consecutive quarters of negative growth.

4. Annual growth falls from 4% to 1.5%. What has happened to real GDP?
   • It is still rising, but more slowly
   • It has fallen
   • It has fallen by 2.5%
   • The economy is in recession
   Show answer

   It is still rising, but more slowly. A positive growth rate means GDP is rising; a lower rate means it rises more slowly.

5. Why are PPP exchange rates used to compare GDP between countries?
   • They are set by central banks
   • They remove the effect of population size
   • They allow for differences in the cost of living between countries
   • They measure inflation
   Show answer

   They allow for differences in the cost of living between countries. PPPs adjust for different price levels, so GDP comparisons reflect real purchasing power.

6. Real GDP per capita was $8,000 last year and $8,240 this year. Find the growth rate of real GDP per capita in %.
   Show answer

   3 %. (8,240 - 8,000) / 8,000 x 100 = 3%.

7. Define a recession.
   Show answer

   Two consecutive quarters of negative economic growth, meaning real GDP falls for at least six months.. The usual definition is two consecutive quarters of negative real GDP growth.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2 (June 2018)
• Pearson Edexcel IAL Economics WEC12 Unit 2 mark scheme, January 2025

Last updated 8 November 2026. Spotted a mistake? Tell us.