What does Purchasing Power Parity (PPP) compare?

• A. What currencies can buy domestically
• B. The level of inflation
• C. The exchange rate
• D. The amount of money in circulation

Answer: (A)

Purchasing Power Parity focuses on price levels across countries and how much each currency can buy in its own economy. It holds that a common basket of goods should cost the same when priced in a single currency, so the exchange rate moves to equalize buying power between currencies. That means PPP is about comparing what currencies can buy domestically—the purchasing power of money in different countries. If one country has higher price levels, its currency would need to adjust so the basket costs match across countries.

The other ideas are related but not the primary focus: inflation is about how prices change over time, not a cross-country price comparison at a point in time; the exchange rate is the outcome PPP tries to explain, not the thing being directly compared; money in circulation concerns money supply, not comparative purchasing power.