What can explain the failure of relative PPP to hold in reality? ...

[Redwolflake15]

What can explain the failure of relative PPP to hold in reality?
 
  What will be an ideal response?

Question 2

A balance of payments crisis is best described as
 
  A) a sharp change in interest rates sparked by a change in expectations about the level of imports.
  B) a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate.
  C) a sharp change in interest rates sparked by a change in expectations about the level of exports.
  D) a sharp change in foreign reserves sparked by a change in expectations about the level of imports.
  E) a sharp change in foreign reserves sparked by a change in expectations about domestic production.

[chreslie]

Answer to Question 1

Government measures of the price level differ from country to country.
One reason for these differences is that people living in different countries spend their income in different ways.
Because of this inherent difference among countries, certain baskets will be affected more by price changes given their consumptions basket. For example, consumers in country, X, eats more fish relative to another country. More than likely, the government, upon determining a commodity basket to reflect preference, will have an overwhelming representation of fish in their basket. Any price level change in the fish market will be felt particularly by country X, and their overall price level will reflect this. Thus, changes in the relative prices of basket components can cause relative PPP to become distorted.

Answer to Question 2

B