Understanding Purchasing Power Parity Theory in International Trade

The video explores the concept of purchasing power parity (PPP) and its role in international trade. It explains how exchange rates adjust over time to reflect price changes, reducing the impact of price differentials on trade. The video discusses the variability of price changes over short and long terms, the effect of exchange rate fluctuations on competitiveness, and the self-correcting nature of PPP. It also highlights factors beyond price, such as product quality and design, that influence trade. The video concludes by emphasizing the importance of understanding PPP for international trade.

What does the Purchasing Power Parity theory predict about exchange rates?

• They change to reflect price changes.

• They remain constant over time.

• They only change due to government intervention.

• They are unaffected by international trade.

How do price changes between countries typically behave over short periods?

• They are highly significant.

• They are not massively significant.

• They are consistent across all countries.

• They show little variability.

Over a 10-year period, how did UK goods' prices compare to Japanese goods?

• UK goods were cheaper.

• UK goods were the same price.

• UK goods were 10% more expensive.

• UK goods were 28.5% more expensive.

Which currency experienced the highest devaluation against the sterling?

• US Dollar

• Euro

• Aussie Dollar

• Japanese Yen

What is the expected effect of a weakening currency on a country's goods?

• Goods become less competitive.

• Goods become more competitive.

• Goods prices remain unchanged.

• Goods become unavailable.

What is a self-correcting mechanism in the context of exchange rates?

• A process that leads to constant trade deficits.

• A process that stabilizes currency values.

• A process that ignores price changes.

• A process that only affects domestic trade.

Besides price, what other factors influence competitiveness?

• Only currency strength.

• Design and quality of products.

• Government policies.

• Market size.

What happens to a country's currency when it has a trade deficit?

• The currency weakens.

• The currency is unaffected.

• The currency remains stable.

• The currency strengthens.

How does the exchange rate adjustment affect pricing differences in the market?

• It amplifies pricing differences.

• It balances out pricing differences.

• It only affects domestic prices.

• It ignores pricing differences.

What is the long-term role of exchange rate adjustments according to PPP?

• To balance price differentials.

• To maintain constant trade levels.

• To increase trade deficits.

• To decrease currency value.