The passage of the North American Free Trade Agreement (NAFTA) in 1994 sharply reduced trade barriers between Canada and Mexico. All else equal, the absolute PPP theory predicts that the exchange rate between the dollar and the peso will adjust to make the cost of goods in Mexico cheaper than the cost of identical goods in Canada.

Question

Quizplus · Accepted Answer

Absolute Purchasing Power Parity (PPP) theory predicts that exchange rates will adjust to equalize the price of identical goods and services between two countries, not to make goods cheaper in one country compared to another.

The Passage of the North American Free Trade Agreement (NAFTA)