Discuss why the empirical support for PPP and the law of one price is weak in recent data
What will be an ideal response?
The failure of these propositions in the real world is related to trade barriers and departures from free competition, factors that can result in pricing to market by exporters. In addition, different definitions of price levels in different countries bedevil attempts to test PPP using the price indexes governments publish. For some products, including many services, international transport costs are so steep that these products become non-tradable (see page 425).
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A local bar provides free pretzels and peanuts. Once a week it even provides chicken wings for only ten cents each. It is
A) selling drinks below cost. B) selling pretzels, peanuts and wings below cost. C) unfairly competing against other local bars who are unable to do the same. D) almost certainly doing none of the above.
Refer to Table 2-9. If the two countries specialize and trade, who should export rice?
A) They should both be exporting rice. B) There is no basis for trade between the two countries. C) Thailand D) Japan