Purchasing power parity refers to:
A) the same inflation rate between trading countries.
B) the same personal disposable income in two countries.
C) the same retail prices in two countries.
D) the nominal exchange rate required to offset differential inflation.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. According to PPP, in the absence of transaction costs and other barriers, the nominal exchange rate between two currencies should equal the ratio of the countries' price levels. This means that after adjusting for the exchange rate, the same amount of money should buy the same basket of goods in both countries. Therefore, PPP is related to the adjustment of exchange rates over time to account for differences in inflation rates, not to having the same inflation rate, disposable income, or retail prices across countries.

Purchasing Power Parity Refers To