A principal reason that purchasing power parity does not hold exactly in practice is
A) that foreign and domestic assets are not perfect substitutes.
B) the existence of non-traded goods.
C) that consumers in different countries have different preferences.
D) that costs of production are not the same in all countries.

Question

Quizplus · Accepted Answer

Purchasing power parity assumes that all goods and services are freely tradable across borders, which is not the case in the real world. Non-traded goods, such as housing or medical services, can have significantly different prices across countries due to factors such as regulations, taxes, or cultural differences. This can lead to deviations from the parity relationship between exchange rates and relative prices.

A Principal Reason That Purchasing Power Parity Does Not Hold