Question

It is important to analyze the purchasing power of a parity of a country because

a. People in different countries decide to buy different items
b. To understand what people buy in different countries
c. To understand the effect that imports will have on the GDP
d. There are currency effects when buying the same items in different countries
e. Big macs are more expensive in some countries

Answer 1

Analyzing purchasing power parity is crucial as it shows the relative value of currencies based on buying power for traded goods, explains price level differences, and allows for adjusting income comparisons to reflect true purchasing power.

Step-by-step explanation:

It is important to analyze the purchasing power parity (PPP) of a country because it provides a better understanding of the relative value of currencies based on their buying power for internationally traded goods. Such an analysis reveals differences in price levels between countries. For instance, if goods like oil, steel, computers, and cars are significantly cheaper in one country compared to another at a given exchange rate, businesses may exploit this by purchasing goods in the country where they are cheaper and selling them where prices are higher, thus making a profit. Besides this, PPP is essential to compare the standard of living between countries, as it considers the cost of the same goods in different nations. While nominal GDP per capita is a common indicator used to assess a country's economic well-being, using PPP allows the conversion of average incomes into "international dollars" which adjusts for differences in price levels and provides a more accurate reflection of purchasing power.