Explain what a purchasing power parity adjustment is and why it is necessary. Should it always be used?

What will be an ideal response?


The PPP adjustment enables us to know internal purchasing power, which is defined as the amount an average income can buy inside the country where the income is earned when it is measured in terms of the cost of a similar basket in the United States. PPP adjustments let us make international comparisons of income based on similarly priced baskets of goods and services. The PPP adjustment is necessary in order to compare actual living standards, while the market exchange rates income is useful to know something about the ability of people to buy goods and services in the world economy.