In order for the condition E$/HK$ = PUS/PHK to hold, what assumptions does the principle of purchasing power parity make?
A) Only that there are no transportation costs and restrictions on trade.
B) Only that the markets are perfectly competitive, i.e., P = MC.
C) The factors of production are identical between countries.
D) No arbitrage exists.
E) HK and the U.S. are perfectly competitive and there are no transportation costs or restrictions on trade.

Question

Quizplus · Accepted Answer

The principle of purchasing power parity (PPP) assumes that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This implies that the markets are perfectly competitive (prices reflect marginal costs) and that there are no barriers to trade such as transportation costs or trade restrictions, which is most closely aligned with option E.

In Order for the Condition E$/HK$ = PUS/PHK to Hold