Is relative PPP a useful equilibrium concept for describing general trends in exchange rates? Under what kinds of circumstances would the concepts of PPP be best applied?
What will be an ideal response?
Relative PPP is not a theory of exchange rate determination but rather an equilibrium condition that may be useful for establishing general trends in exchange rates. It may only be useful for understanding exchange rates in the long run, not on a day to day basis. Moreover, exchange rates vary for multiple reasons, while relative PPP only considers the inflation differential between two currencies. The larger this difference is, the more valuable relative PPP will be for understanding the long term trend in an exchange rate.
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Merit is judged by one's ability to produce
A) what is considered useful by society. B) what is considered valuable by society. C) what is considered beneficial to society. D) all of the above.
Assume, for Mexico, that the domestic price of beets without international trade is higher than the world price of beets. This suggests that, in the production of beets,
a. Mexico has a comparative advantage over other countries and Mexico will export beets. b. Mexico has a comparative advantage over other countries and Mexico will import beets. c. other countries have a comparative advantage over Mexico and Mexico will export beets. d. other countries have a comparative advantage over Mexico and Mexico will import beets.