Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

Question

Quizplus · Accepted Answer

Purchasing power parity only takes into account the relative prices of goods in two countries, but it does not account for factors such as the real exchange rate (the ratio of prices between two countries in terms of a third currency), the presence of nontradeable goods, and differentiated products that can affect the demand for a particular currency and therefore its exchange rate.

Though Useful, Purchasing Power Parity Does Not Completely Explain Long-Run