Purchasing Power Parity stands for which concept?

• A. Balance of Payments
• B. Purchasing Power Parity
• C. Exchange Rate Mechanism
• D. Fiscal Neutrality

Answer: (B)

Purchasing Power Parity is a theory in international economics that exchange rates adjust so the same basket of goods costs the same in every country when priced in a common currency. In other words, it links price levels across countries to the exchange rate, so that purchasing power is comparable internationally.

This question asks you to identify what the term itself refers to. The concept described is Purchasing Power Parity—the idea that currencies should equalize the buying power of different currencies over time. The other options describe different ideas: the balance of payments is about flows of money in and out of a country, the exchange rate mechanism is a system for managing how exchange rates move within bands, and fiscal neutrality is about governments’ budget decisions not distorting private spending.

For a quick illustration: if a basket costs $100 in the United States but costs 400 units of another country’s currency, PPP would imply an exchange rate of 4 units per dollar to equalize purchasing power, though real-world rates can diverge due to various factors.