The purchasing power parity theory is limited in its applicability by the facts that some goods are not internationally traded and some countries impose tariffs on imported goods.

Question

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The purchasing power parity theory assumes that identical goods in different countries should have the same price when converted into a common currency, but this assumption is limited by the fact that some goods, like services and non-tradable goods, cannot be easily traded internationally. Additionally, some countries impose tariffs on imported goods, which can distort prices and prevent them from reflecting their true purchasing power parity.

The Purchasing Power Parity Theory Is Limited in Its Applicability