Purchasing power parity does not provide accurate predictions of exchange rates because

Question

Quizplus · Accepted Answer

Purchasing power parity assumes that there are no price differences across countries for identical goods, however, non-traded goods (such as housing and services) account for a significant portion of a country's economy and their prices cannot be easily compared to prices in other countries. Therefore, this assumption is not accurate and results in inaccurate predictions of exchange rates.

Purchasing Power Parity Does Not Provide Accurate Predictions of Exchange