Test Bank For International Trade Theory And Policy 10th Edition By Krugman
- Chapter 16 (5) Price Levels and the Exchange Rate in the Long Run
16.1 The Law of One Price
1) Which of the following statements is the MOST accurate? The law of one price states
A) in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.
B) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency.
C) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price.
D) identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.
E) in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless of transportation costs.
Answer: A
Page Ref: 413-415
Difficulty: Easy
2) Under Purchasing Power Parity
A) E$/E = PUS/PE.
B) E$/E = PE/PES.
C) E$/E = PUS + PE.
D) E$/E = PUS – PE.
E) E$/P = PUS/PE.
Answer: A
Page Ref: 413-415
Difficulty: Easy
3) Explain the Law of One Price. Give an example.
Answer: The law of one price states that in competitive markets free of transportation costs and trade barriers, identical goods sold in different countries must sell for the same price when expressed in terms of the same currency.
= (E$/£) × ( ) for good i.
E$/£ = /
If, for example, the price of the same sweater was cheaper in London than in New York, U.S. importers and British exporters would have an incentive to buy sweaters in London and ship them to New York, pushing the London price up and the New York price down, until both were equal.
Page Ref: 413-415
Difficulty: Moderate
4) Fill in the following table, assuming the law of one price prevails.
Answer:
Page Ref: 413-415
Difficulty: Moderate
16.2 Purchasing Power Parity
1) Under Purchasing Power Parity
A) E$/E = PiUS/PiE.
B) E$/E = PiE/PiUS.
C) E$/E = PUS/PE.
D) E$/E = PE/PES.
E) E$/E = PiE + PiUS/PiE.
Answer: C
Page Ref: 415-417
Difficulty: Easy
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