Question

How does the ranking of spending by larger nations compare depending on which method is used to convert into a common currency?

Answer 1

There are two basic ways of comparing spending between different countries:

1. By using the official exchange rate and their nominal value. Since the US dollar is the most "powerful" currency in the world, local currencies are exchanged to US dollars, then spending is measured in nominal US dollar values.
2. Purchasing power party uses the US dollar as the base currency for the world and then compensates for changes in the exchange rates. This is usually more accurate since it compensates the fact that less developed nations are cheaper than rich developed countries. For example, a house in Switzerland is worth much more than a similar house in Mexico, therefore, the PPP compensates for this differences.