Dec 7, 2009

An example to explain Purchasing Power Parity to students

Imagine 2 countries, symmetric in every respect. Each country has one restaurant and one consumer. In country A, meals are $10. In country B, $20. In country A, the consumer eats at the restaurant twice a year. In country B, once. Hence, both countries have a GDP of $20. At PPP exchange rates, countrty A is twice as rich. (And that doesn't even take into account the externalities of social interactions). I let you guess which countries I have in mind.

ht: Hozik

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