Question

A method which adjusts GDP to account for different prices in countries is called:

A. Cumulative distribution function

B. Nominal GDP

C. Current currency exchange rate

D. Purchasing power parity

Answer 1

Purchasing Power Parity (PPP) is the method used to adjust GDP for comparing economic output and standard of living between countries, accounting for differences in local prices.

Step-by-step explanation:

The method which adjusts GDP to account for different price levels in countries is known as Purchasing Power Parity (PPP). This approach takes into consideration that the same goods can have varying prices across different countries. By using PPP, we can compare the economic output and standard of living between nations in a way that neutralizes the distortions caused by discrepancies in local prices.

Using market exchange rates for such comparisons can be misleading because these rates fluctuate frequently due to short-term factors in the currency markets. In contrast, PPP provides a more stable and realistic measure as it reflects the long-run equilibrium value of exchange rates, accounting for the actual purchasing power in each country. Therefore, when comparing GDP per capita internationally, economists prefer using PPP to obtain a more accurate economic assessment.