Purchasing-power parity theory does not hold at all times because
A)many goods are not easily transported.
B)the same goods produced in different countries may be imperfect substitutes for each other.
C)Both a and b are correct.
D)prices are different across countries.

Question

Quizplus · Accepted Answer

Purchasing-power parity theory assumes that identical goods are priced identically in different countries. However, this assumption may not hold true due to transportation costs, trade barriers, and different standards of living. Additionally, even if the goods are identical, they may not be perfect substitutes for each other due to different preferences, quality, or branding. Therefore, the theory may fail to predict exchange rates accurately in the short-term or for some specific goods or services.

Purchasing-Power Parity Theory Does Not Hold at All Times Because