Is relative PPP a useful equilibrium concept for describing ...

[SO00]

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?

Question 2

Refer to the table above. France will gain from trade so long as the international price of grapes measured in terms of textiles is below
 
  A) 15.
  B) 3.
  C) 5.
  D) 8.

[ghepp]

Answer to Question 1

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.

Answer to Question 2

B

[SO00]

TYSM

[daiying98]

Thanks for the timely response, appreciate it