Which of the following statements is are correct about Purchasing Power Parity 1 It is an economic t...........

Economic Affairs Balance of Payments

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Which of the following statements is/are correct about Purchasing Power Parity?

1. It is an economic theory that compares different currencies of the countries

through a “basket of goods” approach.

2. China is the world’s largest economy based on purchasing power.

Select the correct answer using the code givenbelow:

1 Only

2 Only

Both 1 and 2

Neither 1 nor 2

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Explanation:

Statement 1 is correct: Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their
purchasing power is the same in each of the two countries.
Statement 2 is correct: The five nations with the highest GDP in market exchange terms are the U.S., China, India, Japan, and Germany. But the sequence changes when PPP is used to compare. China is the world’s largest economy based on purchasing power