According to the purchasing power parity theory, if there are no barriers to trade, exchange rates should adjust so that the same product costs the same in different countries, except for differences in:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → transportation
Purchasing power parity says that, with no trade barriers, exchange rates adjust until the same product costs the same in every country. The only gap allowed is the cost of transportation.
NCERT (2026-27): “Exchange Rates in the Long Run The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system. According to the theory, as long as there are no barriers to trade like tariffs (taxes on trade) and quotas (quantitative limits on imports), exchange rates should eventually adjust so that the same product costs the same whether measured in rupees in India, or dollars in the US, yen in Japan and so on, except for differences in transportation. Over the long run, therefore, exchange rates between any two national currencies adjust to reflect differences in the price levels in the two countries.” |