Question

Suppose individuals wish to obtain the most accurate comparison of living standards between the US and Saudi Arabia. To do so, one would convert Saudi Arabian output into dollars using__________.
A) the current nominal exchange rate.
B) the current real exchange rate.
C) the prior year's real exchange rate.
D) an average of the last five years' exchange rates.
E) purchasing power parity methods.

Answer 1

Answer:

Purchasing power parity methods

Explanation:

Purchasing power parity (PPP) method compares the productivity and the standards of living between countries by using the 'basket of goods approach'.   The basket approach implies a determination of the quantity of money needed to purchase a common unit(basket) of goods and services in different countries.  Two countries will be said to be at par if a 'basket of goods' costs the same considering the exchange rates.

Cost of living and the inflation rate in a country determine the purchasing power of its currency. Purchasing power parity attempts to equalize different currencies by considering inflation and purchasing power in each country.