Question

The Purchasing Power Parity (PPP) is a better measure of real living standards as compared to Per Capita Income (PCI) across countries because:

• A. PPP takes into account the health and education of the country.
• B. PPP takes into account the real exchange rate between countries while comparing income and living standards.
• C. PPP and PCI are same and hence there is no difference.
• D. PPP looks more into income distribution than PCI.

Hint:

Remember: \[ \boxed{ \text{Nominal Income} \neq \text{PPP Income} } \] PPP adjusts income for differences in price levels across countries, making comparisons of living standards more accurate.

Answer 1

The Correct Option is B

Concept: Purchasing Power Parity (PPP) is an exchange rate that equalises the purchasing power of different currencies by considering the prices of a common basket of goods and services. Unlike nominal Per Capita Income, PPP adjusts for differences in price levels across countries, making international comparisons of living standards more meaningful.

Step 1: Understand Purchasing Power Parity (PPP). PPP reflects the amount of goods and services that can actually be purchased with a given income in different countries. Thus, \[ \boxed{ \text{PPP adjusts income using differences in purchasing power.} } \]

Step 2: Examine the given options.
• [(A)] Health and education are components of the Human Development Index (HDI), not PPP.
• [(B)] PPP adjusts for differences in purchasing power and exchange rates, making international comparisons more realistic.
• [(C)] PPP and Per Capita Income are different concepts.
• [(D)] PPP does not directly measure income distribution. Hence, \[ \boxed{ \text{PPP provides a better comparison because it adjusts for purchasing power differences.} } \] Therefore, \[ \boxed{(B)} \]