Explain the theory of purchasing power parity. How does it affect arbitrage?
What will be an ideal response?
This theory states that the prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changes. Purchasing power parity occurs because the process of buying goods in the cheap market and reselling them in the expensive market affects the demand for, and the price of, the foreign currency, as well as the market price of the good itself in the two product markets in question. When purchasing power parity occurs, there is no reason to cross borders to purchase the products.
You might also like to view...
In a partially disclosed agency, the contracting third party transacts directly with the principal and does not know the identity of the agent
Indicate whether the statement is true or false
One way an operational data store differs from a data warehouse is the recency of their data
Indicate whether the statement is true or false