Purchasing Power Parity Concepts

The video tutorial explains the concept of purchasing power and purchasing power parity (PPP) theory, which includes absolute and relative forms. It discusses how currencies have different purchasing powers and how PPP can be used to compare them. The Big Mac Index is introduced as a tool for understanding absolute PPP, while relative PPP is explained in terms of inflation and forward rates.

What does the law of one price imply in the context of purchasing power parity?

• Identical goods should have different prices in different countries.

• Identical goods should have the same price in different countries when converted into a common currency.

• Different goods should have different prices in different countries.

• Different goods should have the same price in the same country.

What is one reason for the difference in the value of a dollar in different countries?

• The difference in the size of the countries.

• The difference in the climate of the countries.

• The difference in the population of the countries.

• The relative purchasing powers of the currencies.

What is the primary focus of purchasing power parity theory?

• The relationship between interest rates and GDP.

• The relationship between GDP and exchange rates.

• The relationship between inflation and exchange rates.

• The relationship between inflation and interest rates.

What is the Big Mac Index used for?

• To calculate the interest rates in different countries.

• To determine the GDP of a country.

• To measure the inflation rate in different countries.

• To compare the purchasing power of different currencies using a common product.

What does the Big Mac Index illustrate about market exchange rates?

• They always match the PPP rates.

• They result in goods costing the same in different countries.

• They can differ from PPP rates.

• They are determined by the Big Mac Index.

How is the spot rate of a currency determined using absolute purchasing power parity?

• By comparing the inflation rates of two countries.

• By comparing the GDP of two countries.

• By using the market exchange rate.

• By dividing the price of a common product in one country by its price in another country.

What is a key difference between market rates and purchasing power parity rates?

• PPP rates are always lower than market rates.

• Market rates are determined by supply and demand, while PPP rates are based on purchasing power.

• PPP rates are based on a single product, while market rates are not.

• Market rates are always higher than PPP rates.

What is the implication of using a basket of goods instead of a single product in PPP calculations?

• It simplifies the calculation process.

• It provides a more comprehensive comparison.

• It makes the theory more complex.

• It makes the theory less accurate.

How does relative purchasing power parity address market imperfections?

• By ignoring consumption patterns.

• By considering inflation rates in different countries.

• By using a single product for comparison.

• By using historical exchange rates.

What does the formula for calculating forward rates in relative PPP include?

• The GDP of the countries involved.

• The inflation rates in the local and foreign countries.

• The interest rates in the local and foreign countries.

• The population size of the countries involved.