| The theory that, in the long run, identical products and services in different countries should cost the same in different countries. This is based on the belief that exchange rates will adjust to eliminate the arbitrage opportunity of buying a product or service in one country and selling it in another. The theory only applies to tradable goods and services, not to immobile goods or local services. The theory also discounts several real world factors, such as transportation costs, taxes and transaction costs, and assumes that there is a competitive market for the goods and services in both countries.
|
