Question

Many times we read about 'PPP' in economic literature. What is PPP?

• A. Tells us the exchange rates between currencies are in equilibrium when their purchasing power is the same in both the countries
• B. It tells us the exchange rates between currencies are in equilibrium when they are adjusted for differences in purchasing power.
• C. PPP means the current exchange rate of a currency against US$
• D. A measure of income inequality in developing countries

Answer 1

The correct option is B It tells us the exchange rates between currencies are in equilibrium when they are adjusted for differences in purchasing power.

The acronym PPP stands for, "Purchasing Power Parity". It is a method of currency valuation that tells us that the exchange rate between two countries must be equal to the ratio of the currencies' respective purchasing power. ie. two identical goods should eventually cost the same in different countries once adjusted for purchasing power parity.