The importance of using purchasing power parity (PPP) exchange rates when making international comparisons of living standards
When comparing living standards between countries, money goes further in some places than others. Purchasing power parity (PPP) adjusts income figures so they reflect what people can actually buy, not just what their currency converts to.
Real World
India's GDP per capita at market exchange rates is around $2,500, but on a PPP basis it rises to roughly $9,000, because a haircut, a meal, or a doctor's visit costs far less in Mumbai than in London — meaning Indians' actual purchasing power is much higher than the raw dollar figure implies.
Exam Focus
State explicitly why PPP matters — 'it adjusts for price level differences between countries' — rather than just saying exchange rates are misleading.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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