Final answer:
Purchasing power parity equalizes the purchasing power of currencies by eliminating differences in price levels between economies. It ensures that comparable goods have similar prices across countries when currencies are converted. PPP exchange rates are calculated to provide a realistic comparison of currency values globally. The correct option is 4.
Step-by-step explanation:
The concept of purchasing power parity (PPP) refers to the exchange rate between currencies that equalizes the purchasing power of each currency by eliminating the differences in price levels in each economy. This means that in the long term, exchange rates should reflect the currency's buying power in terms of goods that are internationally traded, such as oil, steel, computers, and cars. If a currency has strong purchasing power, the country's consumers should be able to buy the same amount of goods as consumers in any other country, assuming a correct PPP exchange rate.
Businesses can exploit exchange rate differences when it is much cheaper to buy internationally traded goods in one country compared to another. Over time, this will influence the exchange rates to adjust, moving towards purchasing power parity. The PPP exchange rate is calculated by organizations such as the World Bank to provide a more accurate measure of the value of currencies across different countries.