Many services are much more expensive in the US. As a result, doesn't the USA's GDP get an artificial boost?

Question

For example, say that a haircut costs $10 in the US but only $1 in China. Clearly, the same service adds 900% more to US's GDP than China's. How is this dealt with in GDP calculation?

Thanks!

Answer 1

There is a concept called Purchasing Power Parity that can be used to compensate for that effect.  Essentially it is an "effective" exchange rate, in your example from Yuan to Dollars set up so that things, on average, cost the same in both countries.  So if "haircuts" were the only things purchasable in China or the US, China's PPP exchange rate would be 10 times its official exchange rate to make the price the same in both countries.

If you really want something to think about, consider two countries between which all things cost exactly the same and they have the same industries, &c, but one country has a higher rate of vandalism.  All else being equal, the country with a vandalism problem will have a higher nominal GDP because it needs windows replaced and walls repainted at a much higher rate than the other, and the payment for that service gets added to the reported GDP, but the loss due to vandalism doesn't get deducted from it.

Answer 2

The reason services cost more in the US is because, on average, a US worker is more productive than one, say, China! They are more productive because they are more educated and specialized. This doesn't mean that people in the US are smarter or better, it just means the US has more output per unit of human capital.