Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be
A) much less in industrialized countries.
B) much less in third world countries.
C) variable depending upon the current rate of exchange between the producer and consumer of the products in the "basket."
D) roughly equivalent in each country.

Question

Quizplus · Accepted Answer

PPP theory states that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country. So, if a basket of goods costs $200 in the United States and ¥20,000 in Japan, PPP predicts that the dollar/yen exchange should be $200/¥20,000 or $.01 per Japanese yen.

Purchasing Power Parity Theory States That Given Relatively Efficient Markets