What does Purchasing Power Parity measure?

• A. It measures the relative purchasing power across currencies
• B. It correlates inflation with unemployment
• C. It fixes currency values relative to gold
• D. It tracks the level of GDP per capita

Answer: (A)

Purchasing Power Parity measures how much buying power currencies have relative to each other by comparing the price of a common basket of goods and services across countries. The core idea is that, after converting currencies at the market rate, the same set of items should cost roughly the same everywhere. If prices are higher in one country, its currency should adjust so that the purchasing power aligns with other currencies. This makes PPP a useful way to assess whether exchange rates reflect differences in price levels and to compare living standards across countries. It doesn’t describe the relationship between inflation and unemployment, it isn’t about tying currencies to gold, and it doesn’t track GDP per capita directly.