Explain the concept of purchasing power parity. What will be ...

[rosent76]

Explain the concept of purchasing power parity.
 
  What will be an ideal response?

Question 2

Figure 4.2 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is 7, there is an
 
  A) excess supply of 8 t-shirts. B) excess supply of 10 t-shirts.
  C) excess demand of 8 t-shirts. D) excess demand of 10 t-shirts.

[DHRUVSHAH]

Answer to Question 1

The purchasing power parity framework is used to convert aggregate incomes into common units. The idea here is to adjust aggregate incomes so that a dollar can purchase the same bundle of commodities in any country. To perform this adjustment, we choose a representative bundle of commodities and calculate what it costs in different countries. Then, using the cost of the bundle in each country relative to its cost in the United States, we obtain a measure of each country's aggregate income in PPP-adjusted U.S. dollars.

Answer to Question 2

C