Since purchasing power parity assumes no barriers to international trade, it is better able to accurately predict exchange rates.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) assumes that in the absence of transaction costs and barriers, goods should cost the same in different countries when prices are expressed in a common currency. However, in reality, there are trade barriers, transportation costs, and other factors that affect exchange rates, making PPP less accurate in predicting short-term exchange rate movements.

Since Purchasing Power Parity Assumes No Barriers to International Trade