Question

Describe two main criticisms of the World Bank’s use of PPP in making inter-country comparisons.

Answer 1

1) As using PPP for comparisons of various countries require the use of an identical product to calculate PPP, but it is almost an impossible task as either the same goods do not exist or are not 100% identical to determine identical products/goods across various economies. So, there is bound to be some kind of difference in the actual and calculated value. Moreover, the standards baskets may vary depending on each country.

2) Moreover, a change in inflation level across nations will effect the real income of a person incase the prices of a category of market basket rises rapidly but it has a low weightage attached.