If the law of one price holds, then:
A) absolute PPP will hold.
B) relative PPP will hold.
C) both absolute and relative PPP will hold.
D) the CPI will hold.
E) the PPI does not change.

Question

Quizplus · Accepted Answer

The law of one price states that identical goods should sell for the same price in two different markets when there are no transportation costs and no differential taxes applied in the two markets. When the law of one price holds, it implies that the purchasing power parity (PPP) should also hold, both in its absolute and relative forms. Absolute PPP refers to the idea that the price levels of two countries should be the same when expressed in a common currency, while relative PPP refers to the rate at which the price levels of two countries will change over time.

If the Law of One Price Holds, Then