Question

In practice, purchasing power parity will not always be the case due to ______. products not...

In practice, purchasing power parity will not always be the case due to ______.

products not being perfect substitutes for one another

arbitrage

the law of one price

exchange rates
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Answer #1

The correct option is B. Arbitrage.

Purchasing power parity refers to the metrics which statea that same price should be set for same goods to be sold across countries, after considering the exchange rate. It means that the price of identical goods and services should be similar in all the countries taking note of the exchange rate prevailing in the country.

The PPP is a non arbitrage condition. Arbitrage refers to the process of taking advantage of the profit arising from the difference in the prices across markets. This is mainly due to different transaction costs.

Thus, PPP assumes that all the goods amd services to be sold at the same prices after adjusting exchange rates while arbitrage does not hold to this theory.

NOTE: I HOPE YOU WILL BE SATISFIED WITH MY ANSWER PLEASE DO PROVIDE RATING. THANK YOU AND HAVE A NICE DAY. :))

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