purchasing power parity adjustments Flashcards
What does Purchasing Power Parity (PPP) allow for?
Comparison between different countries’ currencies through a ‘basket of goods’ approach
PPP provides a method to assess living standards by comparing the cost of a common set of goods in different countries.
What is the primary currency used for measuring GDP per head in international comparisons?
US Dollar
GDP statistics are usually converted to a common currency, typically the US Dollar, at current market rates for better comparison.
Why is it necessary to adjust GDP statistics for living standards?
To avoid underestimating living standards in developing countries
The cost of living is generally higher in developed countries than in developing countries.
What does PPP signify in terms of currency exchange?
The exchange rate needed to buy the same ‘basket of goods’ in each country
This means that currencies are in equilibrium when their purchasing power is equal.
What index does the Economist calculate to show how much exchange rates need to be adjusted for PPP?
Big Mac Index
This index uses the price of a Big Mac to illustrate purchasing power parity adjustments.
What does the theory of purchasing-power parity (PPP) state about exchange rates?
They move towards the rate that would equalise the prices of an identical basket of goods and services
This theory suggests that over time, exchange rates will adjust to reflect the cost of goods in different countries.
What was the average price of a Big Mac in America in July 2024?
US$5.69
This price is used to analyze the implied exchange rate compared to other countries.
What was the average price of a Big Mac in the UK in July 2024?
£4.59
This price is part of the calculation to determine purchasing power parity.
Fill in the blank: According to the Big Mac Index, the implied exchange rate based on the prices of Big Macs is £1 = _______.
US$1.24
True or False: The actual exchange rate of the dollar compared to the pound in July 2024 was lower than the implied exchange rate.
False
The actual exchange rate was 1.28, suggesting the US$ was undervalued.
What adjustments does the Human Development Index (HDI) make in its calculations?
Adjustments in calculations of national income as an indicator of living standards
HDI uses similar principles as PPP to assess living standards across countries.
