The theory of purchasing power parity implies that price differentials between two countries do not exist in the long run.

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity, in the long run, exchange rates should adjust so that the same basket of goods has the same price in different currencies. This implies that price differentials between two countries should not exist in the long run.

The Theory of Purchasing Power Parity Implies That Price Differentials