Suppose the basket that contains 3
half liter bottles of Fanta and 5
Big Macs costs 30
dollars in the U.S., and 10
pounds in the United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom or the UK.
The purchasing power parity exchange rate based on this basket is.
If the market exchange rate is 1.5 dollars = 1
pound, a market exchange rate based GDP comparison when the UK GDP in pounds is expressed in US dollars will undervalue the UK GDP in dollars by as much as 50%.
That means: when we use the PPP based GDP for the
it will be two times the market exchange rate based GDP. [
PPP exchange rate means: what you can buy with 1 dollar in the US, you can also buy in Britain when 1 dollar is converted into pounds at the PPP exchange rate. So, the same amount of money buys the same amount of goods in both countries.
] 1 dollar = 1 pound, UK 0.5 dollars = 1 pound, UK
2 dollars = 1 pound, UK
2 dollars = 1 pound, US 3 dollars = 1 pound, UK