On behalf of your firm, you make frequent trips to Hong Kong. You notice that you always have to pay more dollars to get enough local currency to get your suits dry-cleaned than you have to pay to get your suits dry-cleaned in Canada. Is this consistent with purchasing-power parity?
A) No, but it might be explained by limited opportunities for arbitrage across international borders.
B) Yes, if prices in Hong Kong are rising more rapidly than prices in Canada.
C) Yes, if prices in Hong Kong are rising less rapidly than prices in Canada.
D) No, but it can be explained by arbitrage across international borders.

Question

Quizplus · Accepted Answer

This is not consistent with purchasing-power parity, but it could be due to limited opportunities for arbitrage across international borders. Different countries have different market conditions and factors that affect pricing. There may be restrictions or barriers to trade that prevent the equalization of prices, leading to price discrepancies between countries. In this case, the cost of dry-cleaning in Hong Kong might be affected by local factors, such as the availability of raw materials, labor costs, and local regulations, that are not present in Canada.

On Behalf of Your Firm, You Make Frequent Trips to Hong