The _____ suggests the price for identical products in different countries would be the same,if trade barriers are absent.
A) theory of purchasing power parity
B) fixed exchange rate policy
C) Penn effect
D) Bretton Woods system

Question

The _____ suggests the price for identical products in different countries would be the same,if trade barriers are absent.
A) theory of purchasing power parity 
B) fixed exchange rate policy 
C) Penn effect 
D) Bretton Woods system

Quizplus · Accepted Answer

The theory of purchasing power parity suggests that in the absence of trade barriers and transportation costs, the prices of identical goods in different countries will be equalized through currency exchange rates. This is known as the law of one price, which is one of the assumptions of the theory of purchasing power parity. Therefore, option A is the correct answer. The other options are not related to this theory - B refers to a fixed exchange rate regime, C refers to the observation that prices are higher in richer countries, and D was a system of international monetary management that existed from 1944 to 1971.

The _____ Suggests the Price for Identical Products in Different