Suppose this year the prices of goods and services produced in Japan, especially for housing and food, rise in terms of the local currency, Japanese yen, while the market exchange rate and the prices in the US remain constant. Further assume that the quantities of all goods and services consumed in those countries are given.
(a) If we measure income by PPP GDP based on US prices in terms of US dollars, how do higher prices in Japan affect its measured per capita income relative to the measured per capita incomes of the US? Why?
My answer - Japan has a higher local cost of goods, and relative to the stable cost of goods in the US, Japan will have a lower per capita income
(a) If we measure income by GDP at market prices and market exchange rates, how do higher prices in Japan affect its measured per capita income relative to the measured per capita incomes of the US? Why?