An exchange rate between two countries should equal the ratio of the price level in one country to the price level in the other country is a statement of:
A) the consumer price index.
B) absolute purchasing power parity.
C) relative purchasing power parity.
D) the law of one price.
E) PPI parity.

Question

Quizplus · Accepted Answer

Absolute purchasing power parity holds that the exchange rate between two countries' currencies is equal to the ratio of their price levels. This concept suggests that in the absence of transportation and other transaction costs, identical goods should have the same price in different countries when prices are expressed in a common currency.

An Exchange Rate Between Two Countries Should Equal the Ratio