Question

PPP is_________.

a. a theory that tells us that exchange rates between currencies are in equilibrium
when their purchasing power is the same in both countries.
b. GDP divided by exchange rate.
c. a measure of income inequality.
d. a measure of infant mortality in developing countries

Answer 1

a. a theory that tells us that exchange rates between currencies are in equilibrium when their purchasing power is the same in both countries.

Step-by-step explanation:

PPP (purchasing power parity) is the tool to compare economic productivity and standards of living between countries. Moreover, it deals with comparing different countries' currencies through a "basket of goods" approach. The understanding of currencies being at par means that two currencies are in equilibrium in the meaning of the same pricing of the basket of goods in the both countries considering exchange rates. It is a analyzing and calculation metrics under the Macroeconomic theory.

Here is the formula to calculate PPP:

S=P1/P2 , where,

S= Exchange rate of currency 1 to currency 2

P1 = Cost of good X in currency 1

P2= Cost of good X in currency 2