One major reason why the purchasing power parity theory does not always predict exchange rates accurately is that the theory focuses on trade in

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The purchasing power parity theory is based on the concept that the prices of identical goods and services in two different countries should be equal when expressed in a common currency. Therefore, the theory focuses on the trade of goods and services between two countries. However, several factors, such as differences in taxation, transportation costs, and non-tradable goods, can affect the relationship between prices and exchange rates, causing the theory to be inaccurate in predicting exchange rates.

One Major Reason Why the Purchasing Power Parity Theory Does