Why is purchasing power parity used in international comparisons of GDP per capita?
Answer and explanation
Correct answer: It adjusts for differences in the domestic purchasing power of currencies
A market exchange rate converts currencies using foreign-exchange prices, which may not reflect what money can buy inside each country. Purchasing power parity uses the prices of comparable goods and services to adjust for differences in domestic price levels. PPP-based GDP per capita therefore gives a more meaningful comparison of average material living standards. It does not equalise populations, fully measure inequality, or subtract environmental damage, so B is correct.
Frequently asked questions
What is the correct answer to this question?
It adjusts for differences in the domestic purchasing power of currencies
Why is this the correct answer?
A market exchange rate converts currencies using foreign-exchange prices, which may not reflect what money can buy inside each country. Purchasing power parity uses the prices of comparable goods and services to adjust for differences in domestic price levels. PPP-based GDP per capita therefore gives a more meaningful comparison of average material living standards. It does not equalise populations, fully measure inequality, or subtract environmental damage, so B is correct.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
