Scenario: The price of a standard basket of goods in Country A is 10 pesos. The price of the same basket of goods in country B is 25 francs and $5 in the United States. Country A has an income per capita of 60,000 pesos, and country B has an income per capita of 100,000 francs. Assume full employment in both countries.
-Refer to the scenario above.Why could it be the case that the standard of living is higher in country B than in country A?
A) The PPP-adjusted GDPs differ from the exchange-rate-adjusted GDPs.
B) The numbers of workers in the two countries are not equal.
C) The exchange rates between pesos and the U.S. dollar and francs and the U.S. $ differ.
D) The composition of GDP per capita is not homogeneous within each country.

Question

Quizplus · Accepted Answer

The difference in the price of the standard basket of goods between the two countries reflects the difference in the cost of living. However, this difference may not accurately reflect the difference in the standard of living as it does not account for differences in the exchange rates and purchasing power of each country's currency. Therefore, the PPP-adjusted GDP should be used to compare the standard of living between the two countries. It is possible that the PPP-adjusted GDP of country B is higher than country A, leading to a higher standard of living.

Scenario: the Price of a Standard Basket of Goods in Country