An interesting conclusion from many studies of international price differences is that:
A) prices tend in general to be higher in low-income nations, causing steep declines in their standards of living.
B) on average, prices of traded goods in low-income nations are lower and, therefore, their overall price levels are lower.
C) on average, prices of nontraded goods in low-income nations are lower, but the prices on traded goods are higher and, therefore, their overall price level is not affected.
D) price differences tend to be larger, depending on whether the central bank pegs the nation's currency to the U.S. dollar or the Japanese yen.

Question

Quizplus · Accepted Answer

CB) On average, prices of traded goods in low-income nations are indeed lower due to factors like lower labor costs, which contributes to their overall lower price levels compared to high-income nations. This is a part of what is known as the Penn effect, where the real purchasing power is higher in low-income countries for a given amount of money.C) The prices of nontraded goods (goods and services that are not internationally traded, such as haircuts or housekeeping) in low-income nations are generally lower due to lower labor and production costs. However, for traded goods, prices can be higher due to factors like import tariffs, transportation costs, and lack of economies of scale, which can offset the lower prices of nontraded goods, making the overall price level not necessarily lower or higher solely based on the prices of traded goods. This reflects the complexity of factors influencing price levels in different countries.

An Interesting Conclusion from Many Studies of International Price Differences