Discuss the relationship between PPP and the Law of One Price. What w

Discuss the relationship between PPP and the Law of One Price.

What will be an ideal response?

ANSWER

The law of one price applies to individual commodities while PPP applies to the general price level.
Proponents of PPP argue that its validity in the long run doesn’t require the law of one price to hold exactly. When goods and services temporarily become more expensive in one country than in others, the demands for its currency and its products falls, pushing the exchange rate and domestic prices back in line with PPP and vice versa.