Purchase%20Power%20Parity%20Explained_rev2

Purchase%20Power%20Parity%20Explained_rev2 - Purchase Power...

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Purchase Power Parity (PPP) To More Accurately Assess How Far a Dollar Will Go in Purchasing Goods and Services in Another Country, We Must Apply the Concept of Purchase Power Parity in our Adjustment of GDP Until recently, comparisons of GDP and per capita GDP across different nations (stated in US dollar terms) used only official exchange rate values. Official exchange rate values are based on the prices of goods that are traded between nations. But what about goods that are not traded, such as haircuts, housing, restaurant meals and retail services? GDP converted to US dollars based on the official exchange rate gives misleading comparisons if the ratio of prices of non-traded goods to prices of traded goods is different in the countries being compared. To make more meaningful comparisons of living standards, we must take into account non-traded goods as well as traded goods. So, we calculate real GDP adjusted for Purchase Power Parity: GDP-adj. PPP There are 4 steps involved in adjusting another nation’s GDP to accurately reflect how far a dollar’s income will go in buying goods and services. (refer to Perkins 6 th ed, pp 34 - 39)
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1. STEP ONE: CALCULATE THE GDP FOR EACH NATION IN TERMS OF THEIR RESPECTIVE CURRENCIES. ($US for the USA & rupees for India). a)
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This note was uploaded on 11/10/2011 for the course ECON 4310 taught by Professor Staff during the Fall '08 term at Kennesaw.

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Purchase%20Power%20Parity%20Explained_rev2 - Purchase Power...

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