Purchasing Power Parity (PPP)

Purchasing power parity is a measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries’ currencies. e.g. Let's say that a t-shirt costs Rs 4900 in India. Then it should cost $70 in America when the exchange rate is 70 between the dollar and the rupee.

Significance

  • PPP allows economists to compare economic productivity and standards of living between countries.
  • The PPP exchange rate and inflation may different from the market exchange rate because of poverty, tariffs, and other transaction costs.
  • PPP exchange rates are used to convert the national ....
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