Purchasing power parity may not hold in practice due to all of the following except
A) transportation costs.
B) cross-country differences in environmental regulations.
C) trade barriers like tariffs and quotas.
D) the existence of non-traded goods.

Question

Quizplus · Accepted Answer

Purchasing power parity assumes perfect competition and free trade. However, cross-country differences in environmental regulations can affect production costs, which in turn affect prices and exchange rates. This is an example of a factor that may make PPP not hold in practice. Transportation costs (A), trade barriers (C), and the existence of non-traded goods (D) are also examples of factors that may affect PPP but are explicitly taken into account in the theory.

Purchasing Power Parity May Not Hold in Practice Due to All