An empirical fact that runs counter to purchasing power parity theory is
A) that in the long run, the real exchange rate is one
B) that nations experiencing hyperinflation also experience nominal currency depreciations
C) the law of one price
D) that developing nations have lower price levels than developed nations
E) that gold has essentially the same value throughout the world

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) theory suggests that in the long run, exchange rates should adjust to equalize the price of a basket of goods across different countries. However, it's empirically observed that developing nations often have lower price levels than developed nations, which runs counter to the PPP theory. This discrepancy can be due to various factors, including differences in productivity, consumption patterns, and non-tradable goods and services.

An Empirical Fact That Runs Counter to Purchasing Power Parity