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Chapter 6

Question 1

Explain what you understand by purchasing power parity theory. How do you account for its poor performance at explaining exchange rate movements since 1973?

Question 2

Explain the difference between absolute PPP and relative PPP. How might the distinction between traded and non traded goods be relevant to testing for PPP?

Question 3

Discuss the statistical problems that make testing PPP hard to test empirically. Is the empirical evidence supportive of the PPP theory?

Question 4

“ PPP is not just a theoretical concept it is useful as a measure of the relevant importance of different economies and per capita GDPs compared to using market exchange rate.” Discuss.

Question 5

Explain with reference to the Balassa -Samuelson model why it is that the price of non traded goods are cheaper in developing countries than in developed nations.