Question

For absolute purchasing power parity to hold: a. transaction costs must be observable. b. interest rates must be uniform on a nominal basis. c. inflation rates must be uniform in all markets. d. tariffs must be imposed on all imported goods. e. products must be identical in all markets.

Answer 1

Answer: For absolute purchasing power to hold, the products must be identical in all markets.

Explanation:

Purchasing power parity (PPP) measures the prices in different sectors using a particular product to differentiate the absolute purchasing power that exists between currencies. Purchasing power parity produces an inflation rate which equals the price of the basket of products at a location divided by the price of basket of products at a different location. In PPP, the products compared must be identical.

Purchasing power parity (PPP) is a theoretical rate of exchange that allows an individual to buy the same quantity of goods and services in all countries. According to purchasing power parity, two currencies are in equilibrium when a basket of goods has the same price in two countries, with the exchange rates taken into account.

Answer 2

Answer:

The correct answer is letter "E": products must be identical in all markets.

Explanation:

Purchasing Power Parity (PPP) compares different countries' currencies through a market basket of goods approach. Two currencies are in PPP when a market basket of goods (taking into account the exchange rate) is priced the same in both countries. PPP currency rates are considered more accurate than market-exchange rates.

The Absolute Purchasing Power Parity (APPP) states that the exchange rate between two countries will be equal to the ratio of price levels of the two nations. For that to happen the goods and services traded in both economies must be equal as well as the market conditions.