Question

When we express the value of goods in one country in terms of the same goods in another country, we use?

1) Exchange rate
2) Inflation rate
3) Gross domestic product
4) Interest rate

Answer 1

To compare the GDP of countries with different currencies, we use exchange rates, which represent the value of one currency in terms of another. This allows us to convert the value of goods in one country to the value in another country. There are two types of exchange rates, market exchange rates and purchasing power parity (PPP) equivalent exchange rates.

Step-by-step explanation:

To compare the GDP of countries with different currencies, it is necessary to convert to a "common denominator" using an exchange rate, which is the value of one currency in terms of another currency. We express exchange rates either as the units of country A's currency that need to be traded for a single unit of country B's currency (for example, Japanese yen per British pound), or as the inverse (for example, British pounds per Japanese yen). We can use two types of exchange rates for this purpose, market exchange rates and purchasing power parity (PPP) equivalent exchange rates. Market exchange rates vary on a day-to-day basis depending on supply and demand in foreign exchange markets. PPP-equivalent exchange rates provide a longer run measure of the exchange rate. For this reason, PPP-equivalent exchange rates are typically used for cross-country comparisons of GDP.