Comparing countries' income per head using Purchasing Power Parity exchange rates rather than market exchange rates
A) Exaggerates the difference between rich and poor countries rich countries have greater purchasing power
B) Adjusts for differences in country size
C) Makes income per head calculations more volatile over time
D) Reduces the difference between rich and poor countries because in poor countries a given amount of dollars purchases more goods and services.
E) All of the above

Question

Quizplus · Accepted Answer

Using Purchasing Power Parity exchange rates reduces the difference between rich and poor countries because it takes into account the fact that in poor countries, a given amount of dollars can purchase more goods and services. This adjusts for the differences in the cost of living between countries and makes the income per head calculations more accurate. It does not exaggerate the difference between rich and poor countries, and it does not necessarily adjust for differences in country size. Using PPP rates may make income per head calculations more volatile over time because the value of PPP rates can change, but this is not a significant factor in choosing the best answer.

Comparing Countries' Income Per Head Using Purchasing Power Parity Exchange