What is the logic behind the theory of purchasing-power parity?
The logic behind purchasing-power parity is the law of one price, which asserts that a good must sell for the same price in all locations. If the price for a good is higher in one market than in another, someone can make a profit by purchasing the good where it is relatively cheap, and selling the good where it is relatively expensive. This process of arbitrage leads to an equalization of prices for the good in all locations. If purchasing power parity holds, the amount of dollars it takes to buy a good in the U.S. should buy enough foreign currency to buy the same good in a foreign country.
You might also like to view...
The productivity curve is a relationship between ________ and ________
A) real GDP per hour of labor; capital per hour of labor B) real GDP per hour of labor; capital C) capital per hour of labor; labor per hour of capital D) real GDP; hours of labor E) real GDP; capital
In the figure above, using the midpoint method, what is the price elasticity of demand when the price falls from $8 to $7?
A) 4.0 B) 5.0 C) 0.5 D) 0.4 E) 0.25
Refer to Figure 13-11. The diagram depicts a firm
A) in an increasing-cost industry. B) in long-run equilibrium. C) that is making short-run losses. D) in a constant-cost industry.
A change that increases real money demand relative to the real money supply causes
A) the LM curve to shift down and to the right. B) the LM curve to shift up and to the left. C) the IS curve to shift down and to the left. D) the IS curve to shift up and to the right.