What is required for absolute purchasing power parity to hold? Do you think absolute PPP would hold in the case where a shoe retailer in the U.S. sits directly across the border from a shoe retailer in Canada? How about Houston, Texas, and London, England?
What will be an ideal response?
The requirements for absolute PPP to hold are zero trading costs, lack of trade barriers, and identical goods. Absolute PPP would likely hold to some degree for U.S. and Canadian firms sitting on the border directly across from one another, especially with the reduction of trading costs brought about by NAFTA. However, absolute PPP most likely does not hold for the Houston and London firms because of the significant transportation and search costs between these two disparate locations.
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