Which of the following statements is the MOST accurate?
A) The law of one price applies only to the general price level.
B) The law of one price applies to the general price level while PPP applies to individual commodities.
C) The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities.
D) PPP applies only to individual commodities.
E) The law of one price applies to individual commodities while PPP applies to the general price level.

Question

Quizplus · Accepted Answer

The law of one price states that in the absence of transaction costs and barriers to trade, identical goods should sell for the same price in different countries when prices are expressed in a common currency. Purchasing Power Parity (PPP), on the other hand, is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means PPP applies to the general price level, reflecting the overall cost of living in a country, rather than to prices of individual commodities.

Which of the Following Statements Is the MOST Accurate