Answer to Question #168196 in Microeconomics for Listen Carey

Question

Why is the PPP as a basic indicator of development being criticized in terms of its assumptions on prices of goods and services and currency exchange rates?

Answer 1

This is because Purchasing power parity (PPP) will not be satisfied between countries when there are transportation costs, trade barriers e.g., tariffs, differences in prices of non-tradable inputs e.g., rental space, imperfect information about current market conditions, and when other Forex market participants, such as investors.