The theory of ________ states that the prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changes.

Question

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The theory of purchasing power parity (PPP) posits that in the absence of transportation and other transaction costs, and under conditions of free trade and other forms of perfect competition, identical goods in different countries should have the same price when expressed in a common currency. This is because any differences in price levels would be offset by changes in the exchange rate between the two currencies, leading to an equalization of prices for tradable goods across countries.

The Theory of ________ States That the Prices of Tradable