The richest countries in the world

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The three richest countries in the world are Qatar (1), Luxembourg (2) and Singapore (3) while the poorest are Burundi (182), Zimbabwe (183) and the Democratic Republic of Congo (184). Namibia is ranked at 100 on the list while South Africa is ranked 80th. This is according to Global Finance magazine’s latest ratings.

The magazine explains that there are two standard methods of defining the richest countries in the world. One takes into account the economies that are the largest, as measured by total gross domestic product (GDP). However, the most commonly accepted definition of the wealthiest countries is to determine how rich the average resident of a country is. For this reason, the best method is to use gross domestic product data per capita.

Moreover, Global Finance states that using a PPP (purchasing power parity) basis is arguably more useful when comparing generalised differences in living standards on the whole between nations. This is because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates, which may distort the real differences in income. This is the measure most economists prefer when looking at per-capita wealth and when comparing economic strength between countries and living conditions or use of resources across countries.

According to the World Bank, comparable measures of economic activity, wealth and living standards are useful for many purposes. Foreign investors, traders, and potential immigrants want to know an economy’s market size, productivity and prices.

The globalization of markets for goods, services, finance, labour and ideas reinforces the interdependence of economies and the need to measure them on a common scale. Countries cannot share responsibilities for global public goods – the environment, security, development assistance and global governance – without meaningful assessments of the real size of their economies and the wealth of their people.

But comparing the real size of economies is not easy. Even in an integrated global economy, large differences in the costs of goods and services persist. Exchange rates can be used to convert values in one currency to another, but since they do not fully reflect differences in price levels, they cannot measure the real volume of output.

Exchange rates are determined by the demand for and supply of currencies used in international transactions, ignoring domestic economic sectors where prices are set in relative isolation from the rest of the world—thus the familiar experience of international travellers, who discover that they can buy more, or less, of the same goods in different countries when converting their money using the prevailing exchange rates.

To measure the real size of the world’s economy and to compare costs of living across coun­tries, we need to adjust for differences in purchasing power. Finding a way to adjust for those differences has given rise to the efforts to measure purchasing power parities (PPPs), which convert local currencies to a common currency, such as the U.S. dollar.

Purchasing power parities are needed because similar goods and services have widely varying prices across countries when converted to a common currency using market exchange rates. Differences are greatest in sectors not commonly traded in­ternationally, such as housing, construction and health and education services.

Price differences are smaller for widely traded products, such as machinery and equipment, af­ter allowing for taxes, distributor margins and transport costs. PPPs include the prices of tradable and non-tradable goods, us­ing weights that reflect their relative importance in total GDP.

Since 1970 the International Comparison Program (ICP) has conducted eight rounds of PPP estimates for the major components of countries’ gross domestic product (GDP)—the most recent for 2005. High-income countries regularly take part in such programs, but 2005 was the first time since 1993 that comprehensive price surveys were carried out in developing economies. An unprecedented number, 101, took part. These new PPPs provide a better and more complete view of the world economy.