Global Economy Lecture 2 - History of Economic Growth

Question 1

Explain what ‘purchasing power parity’ is

Answer 1

Purchasing power parity (PPP) is a popular macroeconomic analysis metric used to compare economic productivity and standards of living between countries

PPP involves an economic theory that compares different countries’ currencies through a “basket of goods” approach. That is, PPP is the exchange rate at which one nation’s currency would be converted into another to purchase the same and same amounts of a large group of products.1
International Monetary Fund. “Purchasing Power Parity: Weights Matter.”

According to this concept, two currencies are in equilibrium—their currencies are at par—when a basket of goods is priced the same in both countries, taking into account the exchange rates

Question 2

What’s the name for the ‘macroeconomic analysis metric used to compare economic productivity and standards of living between countries’?

Answer 2

Purchasing Power Parity