Manish Gupta PR No.: 1801016190136 GDIB-Assignment Tutored by : Prof. N Ramesh
1. Explain the terms GDP, GDP-P and PPP. Bring in a correlation between the three through an example. (Max 5-7 lines)
GDP refers to and measures the domestic levels of production of goods and services in a country. It represents the monetary value of all goods and services produced
within a nation’s geographic boundaries over a specified period of time. GDP is often used to indicate the health and size of a nation’s economy. FIIs use this figure
to make decisions about investment in a particular country, while governments use it for drafting plans for its citizen. Often, GDP is calculated quarterly and annually.
GDP-P or GDP per capita is a measure of a country’s economic output that accounts for its number of people. It divides the nations’s GDP by its total population.
This makes the best measurement of a nation’s standard of living. To show the relative performance of the countries, the per capita GDP is especially useful when
comparing one country to another. A rise in per capita GDP signals improvement and growth in the economy and tends to reflect in productivity improvement.
PPP: Purchasing Power Parity aims to measure the adjustments required to be made in the exchange rates of two currencies to make them at par with the purchasing
power of each other. It indicates that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
This indicates that the rate of exchange between two countries should be equal to the ratio of the two countries’ price level for a fixed basket of goods and services.
When a country’s domestic price level is increasing (economy experiences inflation), that country’s rate of exchange must be depreciated in order to return to PPP.
Co-Relation : Each country reports its GDP numbers in their own currency but to bring the parity among various nations, GDP nos. are converted in US $ (As per
exchange rates) which is internationally accepted currency. But this doesn’t provide correct picture as all the nations don’t use the U.S. dollar. For example, China
produced 127 trillion Yuan’s worth of goods and services in 2017. At an exchange rate of 6.37 Yuan per dollar, China’s GDP is $11.97 trillion. The United States
produced $19.36 trillion. But most of that difference is because the cost of living in China is much lower than in the United States. GDP calculation depends on
exchange rates, China’s GDP will change when its exchange rate changes.
So to compare the output PPP recalculates a country’s GDP as if it were being priced in the United States. The CIA World Factbook calculates PPP to compare output
between countries. It estimated that China’s 2017 GDP was $23.1 trillion. It‘s much more than the U.S. GDP of $19.4 trillion. According to PPP, China has the world’s
largest economy.
PPP is used to find out where we can get a McDonald’s Big Mac for less. In 2018, the U.S. Big Mac cost $5.28. In China, same is available for only $3.17. The
Economist’s Big Mac Index reveals what a Big Mac costs in 48 countries. The Big Mac is a good product used by economists to understand PPP.
Like most other sandwiches, the Big Mac doesn’t travel well in its final form so it’s not exported. Most of its price depends on local labor and restaurant rental costs.
Since labor in China is cheaper, the Big Mac costs less than the United States. The Big Mac Index will tell a lot about a country’s cost of living. If anyone wants to live
cheap, one can move to any country in the world, using the Big Mac Index.
2. What are the three key learnings from the study of the Airtel Africa case.(Max 5-7 lines)
a) Airtel move to invest in Africa in 2010 may have been ‘a bit rushed’, and that took several years to fix, time and energy that could have been spent strengthening
the No 1 position in India where it faces intense competition from new entrants. They have compared Mobile ARPU which is twice in Africa but is concentrated in
mostly Northern and Southern parts of Africa where Per capita Income is high but Airtel has no license for that parts of Africa. So key learning is that you need to
prepare a perfect business model along with accurate data before going global.
b) The market dynamics and fundamentals are not exactly the same with the different continents. Airtel followed a low tariff –Minutes Factory Model in Africa,
similar to India but that did not translate to the level of success achieved in India with the same tariff strategy. While acquiring, Airtel over-valued Zain @ $252 per
subscriber when the average minutes of use per subscriber per month was just 100 compared to 350-400 in India. Zain had not invested enough in its Africa assets
and hence Airtel has to pump in some $5 billion cash to maintain the operation, reorganizing the networks and sales and distribution infrastructure in the continent.
