Question

In: Economics

The price of a given basket of goods in Country 1 is 10 karls. The price...

The price of a given basket of goods in Country 1 is 10 karls. The price of the same basket of goods in Country 2 is 25 ritz and $2 in the U.S. Country 1 has a income per capita of 3,200 karls and Country 2 has a income per capita of 5,500 ritz. Which of the following is true?

A. The purchasing power parity-adjusted income per capita of Country 1 is $3,500.
B. The purchasing power parity-adjusted income per capita of Country 2 is $5,800.
C. The purchasing power parity-adjusted income per capita of Country 1 is higher than that of Country 2.
D. The purchasing power parity-adjusted income per capita of Country 1 is lower than that of Country 2.

Which of the following is true?

A. Exchange rate-based measures of income per capita are identical to PPP-based measures.
B. Exchange rate-based measures of income per capita differ from PPP-based measures of income per capita.
C. The gap between the income per capita of U.S and the income per capita of poorer countries is large when PPP-based measures are used.
D. The gap between the income per capita of U.S and the income per capita of poorer countries is small when exchange rate-based measures are used.

Which of the following should be used to compare the incomes of countries with huge differences in cost of living?

A. Gross national product
B. Income per working age population
C. Exchange rate-based measure of income per capita
D. PPP-based measure of income per capita

Expert Solution

We know that, Purchasing power parity (PPP) is an economic theory that allows the comparison of the purchasing power of various world currencies to one another. It is a theoretical exchange rate that allows you to buy the same amount of goods and services in every country.

1). The correct option is (c).

referring to the scenario above the PPP adjusted income per capita in Country 1 is higher than that in country 2.

2). The correct option is (d).

The gap between the income per capita of U.S and the income per capita of poorer countries is small when exchange rate-based measures are used.

We know that, Market Exchange Rates balance the demand and supply for international currencies, while Purchasing Power Parity (PPP) exchange rates capture the differences between the cost of a given bundle of goods and services in different countries.

3). The correct option is (d).

Purchasing power parity based measure of income is the best measure used to compare incomes of the countries with huge difference in cost of living.

Hope you got the answer.

Kindly comment for further explanation.

Thanks ?

Rahul Sunny answered 2 years ago

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