In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,
A)it will hold only if the prices of the constituent commodities are equalized across countries in a given currency.
B)it will hold only if the composition of the consumption basket is the same across countries.
C)it will hold only if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries.
D)none of the options

Question

Quizplus · Accepted Answer

PPP states that the prices of a standard commodity basket should be equalized across countries after converting currencies. This can happen in two ways: either by having identical prices of individual commodities in a common currency or by having different prices in different currencies but with exchange rates adjusted to reflect these differences. Therefore, PPP will hold if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries. Option A and B are incorrect as they only consider one of the two ways PPP can hold.

In View of the Fact That PPP Is the Manifestation