Which of the following best describes purchasing power parity?
A) Total quantity of goods and services produced by an economic system
B) Total quantity of goods and services that can be purchased with one paycheque
C) Total quantity of goods and services that could have been purchased if one's pay rose in the same proportion as inflation
D) The principle that exchange rates are set so that prices of similar products in different countries are about the same
E) The principle that a market economy determines supply and demand for consumer products

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is the principle that exchange rates between currencies are set in a way that the prices of identical goods and services are equivalent in different countries. In other words, PPP implies that currencies will adjust until the same basket of goods has the same price in different countries. The law of one price, which is central to PPP, assumes that there are no trade barriers, transaction costs, or differences in product quality. While PPP is widely used to compare living standards and economic growth across countries, it has limitations and deviations from PPP can persist for a long period due to factors such as market inefficiencies, transportation costs, tariffs, taxes, and regulations.

Which of the Following Best Describes Purchasing Power Parity