Question

According to the FRED data, the euro to dollar market exchange rate in 2019 was $1.12 /euro., According to the OECD, the purchasing power parity rate for Luxembourg was 0.847 euros per dollar. Given this information,

a. No comparison can be made regarding Luxembourg's GDP in dollars with the information given.
b. Luxembourg's GDP in dollars would be greater using the market exchange rate.
c. Luxembourg's GDP in dollars would be the same using either the market or the purchasing power parity exchange rate.
d. Luxembourg's GDP in dollars would be lower using the market exchange rate.

Answer 1

Luxembourg's GDP in dollars would be higher when converted using the market exchange rate of $1.12/euro compared to the OECD's PPP rate of 0.847 euros per dollar.

Step-by-step explanation:

When converting a country's GDP into U.S. dollars for international comparison, economists use either the market exchange rate or the purchasing power parity (PPP) exchange rate. The choice between these rates can significantly affect the dollar value of a country's GDP. In the case of Luxembourg, with a market exchange rate of $1.12/euro in 2019 and a PPP rate of 0.847 euros per dollar according to the OECD, we must calculate the value of GDP in dollars using both.

If Luxembourg's GDP is converted using the market exchange rate, more dollars are needed to match each euro (since $1.12 > $0.847), resulting in a higher dollar value of Luxembourg's GDP compared to the PPP rate. Conversely, using the PPP rate implies fewer dollars per euro, yielding a lower dollar value for the same amount of euros. Therefore, option b. Luxembourg's GDP in dollars would be greater using the market exchange rate is correct.