The purchasing power parity theory is not a good explanation of nominal exchange rate determination in the short run, because many goods and services are non-traded and not all traded goods are standardised commodities.

Question

Quizplus · Accepted Answer

The statement correctly points out the limitations of the Purchasing Power Parity theory in explaining nominal exchange rate determination in the short run, due to non-traded goods and non-standardised commodities.

The Purchasing Power Parity Theory Is Not a Good Explanation