Question

Which of the following concepts is based on the law of one price?
Select one:
a. Relative Purchasing Power Parity
b. Absolute Purchasing Power Parity
c. Covered interest Parity
d. Triangular Arbitrage

Answer 1

The law of one price is an economic concept that states that the price of an identical asset or commodity will have the same price globally, regardless of location, when certain factors are considered.

Absolute Purchasing Power Parity and Relative Purchasing Power Parity is based on the concept of Law of one Price

Absolute Purchasing Power Parity theory assumes that equilibrium in the exchange rate between two currencies will force their purchasing powers to be equal. This theory is likely to hold well for commodities which are easily transportable between the two countries.

Relative purchasing power parity is an economic theory which predicts a relationship between the inflation rates of two countries over a specified period and the movement in the exchange rate between their two currencies over the same period.Change in exchange rate equal to change in the ratio of price level