The purchasing power parity theory

Question

Quizplus · Accepted Answer

The purchasing power parity theory assumes that identical goods should cost the same in different countries, but it does not account for goods and services that are not traded across borders, such as housing and medical services. Therefore, while it may provide some insight in the long run, it is not a reliable predictor of short-term exchange rate movements. Option A is incorrect as the question specifically asks about the predictive power of the theory. Option B is incorrect as the theory is only one of many factors that determine exchange rates.

The Purchasing Power Parity Theory