Question

Which one of the following may not explain the observed deviations from purchasing power parity (PPP) among the currencies of different countries?

a. Differences in regulations and taxes across countries.

b. Trade barriers and transportation costs.

c. Lack of perfect competition in most markets.

d. Differences in the prices of perfectly tradable products when measured in a common currency.

e. None of the above.

Answer 1

Option d is not correct

Deviations from the purchasing power parity can occur due to various reasons. Law of one price may not hold because of different transaction costs and trade restrictions such as tariffs and quotas. Monopolies and oligopolies are responsible for creating divergence in prices. there are different basket of commodities in comparable Nations and therefore the basket has a different cost in different country. There is a lack of perfect substitution between tradable goods which implies that most of the goods are not perfectly tradable.