Question

Choose the statement that is incorrect.

A.Comparisons of real GDP between countries are most accurate when we use market prices.
B.Using PPP prices calculates real GDP using the same prices for all countries.
C.Market prices vary between countries.
D.Using market prices calculates real GDP using prices that prevail in each country.

Answer 1

The incorrect statement among the options provided is that comparisons of real GDP between countries are most accurate when using market prices, since market rates can fluctuate significantly, distorting economic comparisons.

Step-by-step explanation:

The incorrect statement is: Comparisons of real GDP between countries are most accurate when we use market prices. This statement is incorrect because market exchange rates can fluctuate dramatically over short periods, making them unreliable for accurate cross-country GDP comparisons. On the other hand, using Purchasing Power Parity (PPP) adjusts for cost of living and inflation differences between countries, which provides a more stable and realistic comparison of economic output.

It is crucial to utilize a consistent basis for comparing the economic output of different nations. PPP prices provide a uniform approach to calculating real GDP by using a consistent set of prices for all countries. Therefore, PPP-equivalent exchange rates are typically used by economists over market exchange rates for GDP cross-country comparisons.