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International trade barriers include quotas, import tariffs, and export duties: when successfully enforced, these allow domestic...

International trade barriers include quotas, import tariffs, and export duties: when successfully enforced, these allow domestic and foreign prices to diverge. As a result, with trade barriers the (absolute) purchasing power parity is ____________ to hold.

a. likely

b. unlikely

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Answer #1

We know that Purchasing power parity(PPP) explains the Law of one price for two same good in different nations provided that there is no transaction costs associated with it as it will not lead to arbitrage.

Absolute Purchasing power parity explains the theory of PPP with ratio of exchange rate relative to the changes in price.

  • As we know trade barriers are like transaction cost so that for PPPit will reflect a change in price level . So for trade barrier Absolute purchasing power parity is unlikely to hold.

International trade barriers include quotas, import tariffs, and export duties: when successfully enforced, these allow domestic and foreign prices to diverge. As a result, with trade barriers the (absolute) purchasing power parity is unlikely to hold.

b. Unlikely ​​​​​​​is correct

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