Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) implies that in the absence of trade barriers and transaction costs, identical goods should have the same price in different countries when measured in a common currency. In this case, the identical item costs $100 in the U.S. and $127 in Canada, which is consistent with PPP.

Assume That an Item Costs $100 in the U