The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.

Question

Quizplus · Accepted Answer

The statement is true. The relative form of PPP takes into account market imperfections that may affect the prices of goods and services in different countries, and adjust for these imperfections in establishing a relationship between inflation rates and exchange rates. This can lead to a more accurate estimation of exchange rate movements based on fundamental economic factors.

The Relative Form of Purchasing Power Parity (PPP) Accounts for the Possibility