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Macroeconomics

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Necessary Assumptions for Absolute PPP

MACRO-UCAK8L

Absolute purchasing power parity (PPP) can be written as follows:

$$e \times p^* = p$$

...where $e$ is the nominal exchange rate measured in home country currency per unit of foreign currency, $p$ is the home country currency cost of a basket of home goods, and $p^*$ is the foreign currency price of a foreign basket.

Which of the following assumptions are necessary for absolute PPP. Select ALL correct responses.

A

The baskets of goods for the two countries must be identical.

B

Transportation costs must be negligible for all goods.

C

Tariff rates must be negligible for all goods.

D

Non-tariff barriers must be negligible for all goods.