Final answer:
Option (a), Purchasing power parity is used to compare the gross domestic product between countries rather than using market exchange rates, which can be volatile and misleading.
Step-by-step explanation:
Purchasing power parity (PPP) is used to compare the gross domestic product (GDP) between countries. PPP is vital because it provides a more accurate method for comparing economic productivity and standards of living between countries. The PPP exchange rates equalize the prices of internationally traded goods across countries, ensuring that the same amount of money has the same purchasing power in different economies.
Using market exchange rates for cross-country comparisons of GDP per capita can be misleading because these rates can fluctuate significantly over a short period due to speculation, interest rates, and other economic factors. These fluctuations might not reflect the underlying economic fundamentals and can distort the actual purchasing power of a country's currency. Therefore, PPP equivalent exchange rates, determined by the long run equilibrium value of an exchange rate, offer a more stable and accurate representation of the economic conditions of countries.
For instance, the International Comparison Program, run by the World Bank, calculates the PPP exchange rates for all countries based on detailed studies of the prices and quantities of internationally tradable goods. This calculation helps investors, businesses, and policymakers make more informed decisions by providing a clearer picture of the comparative economic strengths of different countries.