On behalf of your firm, you make frequent trips to Hong Kong. You notice that you always have to pay more dollars to get enough local currency to get your hair styled than you have to pay to get your hair styled in Canada. Is this consistent with purchasing power parity?
A)No, but it might be explained by limited opportunities for arbitrage across international borders.
B)Yes, if prices in Hong Kong are rising more rapidly than prices in Canada.
C)Yes, if prices in Hong Kong are rising less rapidly than prices in Canada.
D)No, but it can be explained by arbitrage across international borders.

Question

Quizplus · Accepted Answer

This situation may not be consistent with purchasing power parity (PPP) because the prices for the same service are different in different countries. However, it is possible that there are limited opportunities for arbitrage across international borders, which may explain why the prices differ. For example, there may be differences in regulations, taxes, or transportation costs that make it difficult to equalize prices.

On Behalf of Your Firm, You Make Frequent Trips to Hong