Which of the following assumptions is NOT compatible with PPP in its strict form?
A) The absence of restrictions on the movement of commodities
B) Zero transportation costs
C) Zero tariffs
D) Traders are risk averse

Question

Quizplus · Accepted Answer

The Purchasing Power Parity (PPP) theory, in its strict form, assumes perfect arbitrage conditions, meaning that traders will immediately exploit differences in price levels between countries to make a profit. This assumption implies that traders are risk-neutral, as they are willing to engage in arbitrage whenever there is an opportunity, without fear of potential losses. Therefore, the assumption that traders are risk averse is not compatible with PPP in its strict form, as it would deter them from engaging in arbitrage due to fear of potential risks.

Which of the Following Assumptions Is NOT Compatible with PPP