Why do you use purchasing power parities (PPPs) instead of market exchange rates for comparing levels of gross domestic product (GDP) per capita and per employed person?
Purchasing Power Parities (PPPs) reflect the relative purchasing power of each currency, whereas market exchange rates seldom do. At best, even freely fluctuating market exchange rates represent only the relative values of currencies for goods and services that are traded internationally, not the relative value of total domestic output, which also consists of goods, and particularly services, that are not traded or which are isolated from the effects of foreign trade. Market exchange rates are also affected by influences entirely unrelated to the relative values of currencies for purchases of goods or services. These influences include currency traders’ views of the stability of various countries’ governments, relative interest rates among countries, and other incentives for holding financial assets in one country compared to another.
Related Questions
- Why do you use purchasing power parities (PPPs) instead of market exchange rates for comparing levels of gross domestic product (GDP) per capita and per employed person?
- Is it appropriate to use exchange rates as conversion factors when measuring and comparing income levels per capita?
- Who or what determines the exchange rates in the foreign currency market?
