Paper 1 · Exchange Rates and International Trade
One of the criticisms of the purchasing power parity theory is that it
Adoes not allow for the possibility of devaluation
Bdoes not allow for the effect of tariffs
Cdoes not take into account the influence of disequilibrium in the balance of payments
Dis difficult to compare accurately purchasing power in different countries
Explanation: It is difficult to compare accurately purchasing power in different countries.
ZIMSEC Economics Paper 1, June 2009, Q40
