In order for the condition E_$/HK$ = P_US/P_HK to hold, what assumptions does the principle of purchasing power parity make? A) Only that there are no transportation costs and restrictions on trade. B) Only that the markets are perfectly competitive, i.e., P = MC. C) The factors of production are identical between countries. D) No arbitrage exists. E) HK and US are perfectly competitive and there are no transportation costs or restrictions on trade.

Question

Quizplus · Accepted Answer

The principle of purchasing power parity assumes that markets are perfectly competitive and there are no transportation costs or restrictions on trade, which is encapsulated in option E.

In Order for the Condition E$/HK$ = PUS/PHK to Hold

In Order for the Condition E_$/HK$ = P_US/P_HK to Hold