What effect do non-tradable goods have on PPP?
What will be an ideal response?
The effect is quite substantial.
In 2006, the output of non-tradable goods accounted for about 46% of U.S. GNP. Along with haircuts, non-tradable goods include routine medical treatment, housing etc. For the most part, non-tradable goods are comprised of services, and the output of the construction industry. Non-tradable help explain much of the wide departure from PPP that is present in empirical data.
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