Is PPP a theory of exchange rate determination? Explain why or ...

[urbanoutfitters]

Is PPP a theory of exchange rate determination? Explain why or why not?
 
  What will be an ideal response?

Question 2

International Economists cannot discuss the effects of international trade or recommend changes in government policies toward trade with any confidence unless they know
 
  A) their theory is the best available.
  B) their theory is internally consistent.
  C) their theory passes the reasonable person legal criteria.
  D) their theory is good enough to explain the international trade that is actually observed.
  E) their theory accounts for China's unique position in international trade.

[bassamabas]

Answer to Question 1

PPP is not a theory of exchange rate determination. It describes an equilibrium relationship between two endogenous variablesprices and exchange rates. As such, the PPP relationship should be viewed as a short-cut rather than a substitute for a complete determination of prices and exchange rates. Its main usefulness is in providing a guide to the general trend of exchange rates rather than day-to-day fluctuations.

Answer to Question 2

D

[urbanoutfitters]

Gracias!

[Dnite]

Excellent