2.1.1 - Economic Growth - PPP and Exchange Rates

Question 1

Define Purchasing Power Parity Exchange Rate

Answer 1

.PPP is the exchange rate that equalises the price of a given basket of products in two countries

.They are adjusted to compare living standards

Equation : Price of Basket of goods in the US ➗ Price of Basket of goods in the UK

E.g. if a bar of chocolate priced £1 in the UK sells for $2 in the USA. Then the PPP exchange is $2 = £1.

$2 buys the same amount of chocolate in the UK and USA unlike market exchange rate.

.For international comparisons for living standards and comparing cost of living between countries PPP gets used

.Used to adjust national income statistics to minimise misleading comparisons

Question 2

Define market exchange rate

Answer 2

.the price of a currency expressed in terms of another currency

e.g. £1 = $2

.The dollar exchange rate means the number of of dollars one pound can buy.

. Not accurate in demonstrating the purchasing power of peoples’ income in different countries

Question 3

Define currency appreciation

Define currency deprecation

Answer 3

1.) An increase in the value of one currency in relation to another currency

2.) Loss of value in a country’s currency in relation to another currency