is the law of one price and the theory of purchasing power parity the same?

Question

it is a true or false question

Answer 1

Purchasing power parity refers to foreign exchange rates. The theory is that exchange rate equilibrium is a rate at which things cost the same in both countries. It is therefore a specific example of the 'law of one price' which is saying that a good (or service) should price the same as an identical item.

In practice, items are rarely identical. Consumers do not perceive the tins of beans in the market stall outside the supermarket to be the same as the ones on the shelves in the supermarket, even if in fact they are. The ones on the market stall will be cheaper. You can argue that consumers have more confidence in the supermarket and in their recourse if the beans are foul, so for hat reason the items are not as identical to consumers as they were when they left the tinning factory.

The theory of ppp is wrong, though, because what actually is true is that exchange rates tend to move in the long run towards levels that create equilibrium on the overall balance of payments (current + capital a/c). Since countries' competitivenesses are not equal at ppp, and since some countries are more attractive than others to capital inflows, there will be no predictable relationship between exchange rates and ppp.

Answer 2

procuring ability Parity - PPP A theory retaining that over the destiny the substitute fee between 2 currencies adjusts in accordance to currencies' relative procuring ability. In different words, the substitute fee adjusts so as that an similar reliable in 2 different international places has the same cost at the same time as expressed interior the same forex. as an example, a chocolate bar that sells for CAD $a million.50 in a Canadian city might want to cost USD $a million.00 in a U.S. city at the same time as the substitute fee between Canada and the U.S. is a million.50 CAD/USD. (both chocolate bars cost USD $a million.00.)

Answer 3

they are connected, every same good should have the same price.