Multiple choice

While calculating the development indexes a term called GDP at Purchasing Power Parity is always used. Which among the following facts is not true about Purchasing Power Parity index? (1) Purchasing Power parity (PPP) is a theory, which says that the long-run equilibrium exchange rate of two currencies is the rate that equalizes the currencies' purchasing power. (2) These special exchange rates are often used to compare the standards of living of two or more countries. (3) In works on the basis of the law of one price which says: “In an efficient market all identical goods must have only one price.” Which of the above statements is/are true?

  1. Only (1) and (2)

  2. Only (2) and (3)

  3. All (1), (2) and (3)

  4. Only (1)
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

All three statements about Purchasing Power Parity are correct. PPP theory states that exchange rates equalize purchasing power in the long run (1). PPP rates are standard for comparing living standards across countries (2). PPP is grounded in the law of one price, which posits that identical goods should have a single price in efficient markets (3). The question asks which statement is not true, but the correct answer is that all statements are true.

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