QUESTION 1The theory of Purchasing Power Parity claims thatO A. prices of similar goods in different countries should be the samO B. nominal exchange rates should be equal to 1O C. inflation rates should be the same across countriesO D. prices of non-traded goods should be the same in different countriese

International trade includes the flow of goods and services across the borders of economies. Globalization and opening up of the economies is a major milestone in the history of international trade. The differences in the price of goods across countries allow provides arbitrage opportunities. Poeple buy goods from countries having lower price and sells it in countries having higher prices and earn profits.The purchasing power parity is based on the law of one price. The theory states that if there are no transaction costs or trade barriers, the price of the same basket of goods should be the same across all locations. That is, the price of similar goods should be the same across all the countries. Therefore the correct option is A The purchasing power parity does not claim that the nominal exchange rate should be 1. It argues that the differences in prices across countries should be accounted for in the exchange rate. Therefore option B is not correct. Purchasing power parity does not state that the inflation rates should be the same for the countries. Therefore option C is not correct. According to purchasing power parity, the price of the traded goods should be the same, but the price of non-traded goods can vary. Therefore option D is not correct.

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The theory of Purchasing Power Parity claims that O A. prices of similar goods in different countries should be the same O B. nominal exchange rates should be equal to 1 OC.inflation rates should be the same across countries O D. prices of non-traded goods should be the same in different countries

The theory of Purchasing Power Parity claims that O A. prices of similar goods in different countries should be the same O B. nominal exchange rates should be equal to 1 OC.inflation rates should be the same across countries O D. prices of non-traded goods should be the same in different countries

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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