Question

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Discuss in detail the theory of Purchasing Power Parity.? Discuss?

Answer 1

Purchasing power parity is a measure of comparing economic productivity and standard of living between countries and across time. It aims to determine the adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other. It is widely used to compare income levels in different countries.

To facilitate this comparison, International Comparison Program was established in 1968 by United Nation. The purchasing power parity generated by them is based on worldwide price survey comparing the prices of various goods. It is also used by international organizations like World Bank to construct a report once in three years to compare countries in terms of purchasing power parity. Other organizations like IMF and OECD use weights based on PPP metrics to make predictions and recommend economic policy.