Introduction 📜

1. Purchasing power parity (PPP) is a theory in economics that states that exchange rates between countries should adjust to equalize the purchasing power of different currencies.

2. PPP is based on the idea that a basket of goods should cost the same in different countries when measured in the same currency.

Importance 💼

1. PPP is used to compare the relative cost of living and inflation rates between countries.

2. PPP is also used to make international trade and investment decisions, as it suggests that countries with lower purchasing power should have lower exchange rates.

3. PPP is also used to evaluate the relative value of different currencies and to make exchange rate predictions.

Common Interview Questions 💬

1. What is purchasing power parity?

2. How is purchasing power parity used to compare the relative cost of living and inflation rates between countries?

3. How is purchasing power parity used in international trade and investment decisions?

4. What are some of the advantages and disadvantages of using purchasing power parity?

Advantages 💡

1. PPP helps to compare the relative cost of living and inflation rates between countries.

2. PPP can be used to make international trade and investment decisions, as it suggests that countries with lower purchasing power should have lower exchange rates.

3. PPP can also be used to evaluate the relative value of different currencies and to make exchange rate predictions.

Disadvantages 🚫

1. PPP assumes that markets are perfectly efficient and that there are no transaction costs or barriers to trade, which may not always be the case in the real world.

2. PPP also assumes that prices for a basket of goods will be the same across different countries, which may not always be the case.

3. PPP may not always be useful in practice, as it is based on theoretical assumptions that may not always hold in the real world.

Conclusion 🔚

1. Purchasing power parity is a theory in economics that states that exchange rates between countries should adjust to equalize the purchasing power of different currencies.

2. PPP is used to compare the relative cost of living and inflation rates between countries, make international trade and investment decisions, and evaluate the relative value of different currencies.

3. While PPP has advantages such as helping to compare the relative cost of living, it also has disadvantages such as assuming markets are perfectly efficient and that prices for a basket of goods will be the same across different countries.