Question

If $30 can buy a dozen roses in the United States, and purchasing power parity holds, then $30 should also be enough to buy a dozen roses in Turkey—or, more specifically, the Turkish lira equivalent of $30 should be sufficient to buy a dozen roses in Turkey. Suppose purchasing power parity does not hold between the two nations, which of the following would account for a discrepancy in the price of a dozen roses?
a. identical roses
b. non-identical roses
c. transportation costs
d. roses are not perfectly tradable
e. prices may not have fully adjusted

Answer 1

Answer: b. non-identical roses

c. transportation costs

d. roses are not perfectly tradable

e. prices may not have fully adjusted

Explanation:

The roses in the two countries might not be identical and so will probably not be charged the same. They may be Differentiated so different prices will be charged.

There is also transportation costs to account for. If the roses are being grown in the US for instance the transfered to Turkey, the transport cost will be included in that figure as opposed to the US where it was produced.

If the Roses are not perfectly tradable, that could lead to a difference in price as well because the amounts will differ as the roses cannot go for the exact price in both countries.

Finally, prices in Turkey may not have fully adjusted to prices in the US yet. When that happens then they might be charged at the same amount.