Absolute PPP and relative PPP differ in what way?
A) Absolute PPP always holds but relative PPP may not.
B) Relative PPP may hold even when absolute PPP does not.
C) Relative and absolute PPP always hold.
D) Absolute PPP relates to changes in inflation and exchange rates, whereas relative PPP relates to their levels.

Question

Quizplus · Accepted Answer

Relative PPP is a more flexible concept that can hold even when absolute PPP does not, due to factors like transportation costs and trade barriers affecting absolute PPP. Absolute PPP suggests that the purchasing power of two currencies is exactly the same when adjusted for exchange rates, which is often not the case in reality. Relative PPP, on the other hand, deals with the rate of change in prices between two countries and how it affects exchange rates over time, allowing for some deviations from the strict one-to-one price comparisons of absolute PPP.

Absolute PPP and Relative PPP Differ in What Way