Briefly explain the theory of purchasing power parity and the law ...

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Briefly explain the theory of purchasing power parity and the law of one price.
 
  What will be an ideal response?

Question 2

One advantage of importing is that an importer can diversify its operating risks by developing alternative suppliers.
 
  Indicate whether the statement is true or false

[whitcassie]

Answer to Question 1

The theory of purchasing power parity states that the prices of tradeable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changes. The law of one price states that arbitrage will continue until the price of the good in question is identical in both markets (excluding transaction, transportation and other costs).

Answer to Question 2

TRUE