Question

discuss in detail the theory of purchasing power parity

Answer 1

Solution -

Purchasing Power Parity

One way, called GDP at exchange rate, is when the currencies of all countries are converted into USD (United States Dollar). The second way is GDP (PPP) or GDP atPurchasing Power Parity (PPP).

Purchasing power parity (PPP) is an economic theory that states that the exchange rate between two currencies is equal to the ratio of the currencies' respective purchasing power.

Real GDP takes the nominal GDP and adjusts it for inflation. Further, some accounts of GDP are adjusted for relative purchasing power parity or PPP. Thisadjustment is based on an attempt to convert nominal GDP into a number more easily comparable between countries with different currencies

Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a market "basket of goods" approach.