Question

Which of the following prevents the purchasing power parity theorem from holding perfectly?

Select one:

a. goods that cannot be shipped

b. transportation costs

c. transportation costs, goods that cannot be shipped, and tariffs and quotas

d. tariffs and quotas

An exchange rate depreciation is:

Select one:

a. an increase in the price of one currency in terms of another currency.

b. the rate at which you can exchange the goods and services of one country for the goods and services of another.

c. the rate at which you can exchange one currency for another.

d. a decrease in the price of a currency in terms of another currency.

Answer 1

1) purchasing power parity theorem does not hold perfectly because of the existence of goods that cannot be shipped. These are those goods which have high weight to value ratio. Due to the existence of transportation costs the law of One price that is is the purchasing power parity theorem does not hold. Moreover the trade barriers like tariffs and quotas also prevent the purchasing power parity theorem from holding. Hence, transportation costs, goods that cannot be shipped and tariffs and quotas are the principal reasons preventing the purchasing power parity theorem from holding perfectly.

Hence, option c is correct.

2) exchange rate is the price of a currency in terms of another currency. Exchange rate depreciation means decrease in the price of a currency in terms of another currency.

Hence, option d is correct.