Question

Define the following terms:

i. Purchasing power parity

ii. Terms of Trade

iii. Fixed Exchange Rate

Answer 1

I) Purchasing power parity (PPP) is a metric used by macroeconomic analysts that compares different countries' currencies through a "basket of goods" approach.It allows for economists to compare economic productivity and standards of living between countries.

II) Terms of trade is the ratio of an index of a country's export prices to an index of its import prices. It is the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices.

III) A fixed exchange rate is a regime applied by a government or central bank ties the country's currency official exchange rate to another country's currency or the price of gold. It’s purpose is to keep a currency's value within a narrow band.

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