India ranks 4th among global economies

Country	2004 GDP in trillion dollars
United States	10.980
China	6.449
Japan	3.567
India	3.022
Germany	2.271

As the G-8 meet in Gleneagles, there's a question increasingly doing the rounds: what is the relevance of the group? It was supposed to be a group of the world's largest and most p o w e r f u l economies. The plain truth is, it no longer is.

Look at it whichever way you will, the US, Japan, Germany, UK, France, Italy, Canada and Russia are simply not the biggest economies.

Nor can anyone today suggest that China, for instance, can be left out of any list of the most powerful economies.

In fact, if economies are ranked by sheer size, China would be second only to the US and India would come in at no 4, one place behind Japan and comfortably ahead of Germany.

How? That's because the sizes of economies are no longer measured by converting their gross domestic product (GDP) into US dollars at the prevailing exchange rates. Instead, we have what is called the purchasing power parity (PPP) rate that is used by institutions like the International Monetary Fund (IMF) and the World Bank to compare GDPs of different countries.

What the PPP method does is to recognise that exchange rates do not properly represent what different currencies can buy in their own home economies and hence distort the picture when we are comparing sizes across countries.

Exchange rates are determined essentially only by goods that are traded across borders. They would not, therefore, take into account the fact that, say, a haircut in Delhi or Mumbai may cost just Rs 50 while the same haircut in New York may cost around $20.

Now if India's GDP were converted into dollars using the normal exchange rate, our barber's contribution to GDP would be just over a dollar for each hair cut he provides while the New York barber would be weighing into the US economy at $20 per cut.