AI-generated practice question — model-generated for extra practice, not a previous-year CBSE board question.
Market exchange rates reflect currency values but not actual purchasing power within a country. Prices of goods and services differ across countries, so the same dollar amount buys different quantities in different places. PPP adjusts for this by measuring income in terms of what it can actually buy, ensuring a fairer and more accurate comparison of living standards across countries.
Source: Human Development Report, Chapter 1
The textbook (Table 1.6 footnote) states: "Per capita income is calculated in dollars for all countries so that it can be compared. It is also done in a way so that every dollar would buy the same amount of goods and services in any country." This is the PPP concept. Examiners expect you to explain two things: (1) why simple dollar conversion is inadequate (price levels differ), and (2) what PPP does (equalises purchasing power). Keep it concise — two sentences covering both points is enough for 2 marks.