How does PPP works when we consider Ricardo's comparative advantage analysis i.e if a country is rich in resources to produce a good while the other country is poor for the same,the costs wud be different. could u plz explain dis thng to me(if u get my point)??
If I understand it right: country A can produce good X easier than country B. Should good X be cheaper in A than in B? Will this be contrary to the law of one price? Well, the key fact is not the cost of production but whether X is a tradable or a non-tradable good (whether one can easily import/export X). If X is tradable, law of one price should hold regardless of production costs. The price of X should be comparable in A and B, after adjusting for imperfections such as transport, information, taxation etc. Gold is not much cheaper in countries that produce it (again taking into consideration market imperfections) than in countries without gold mines.
How does PPP works when we consider Ricardo's comparative advantage analysis i.e if a country is rich in resources to produce a good while the other country is poor for the same,the costs wud be different.
could u plz explain dis thng to me(if u get my point)??
If I understand it right: country A can produce good X easier than country B. Should good X be cheaper in A than in B? Will this be contrary to the law of one price? Well, the key fact is not the cost of production but whether X is a tradable or a non-tradable good (whether one can easily import/export X). If X is tradable, law of one price should hold regardless of production costs. The price of X should be comparable in A and B, after adjusting for imperfections such as transport, information, taxation etc. Gold is not much cheaper in countries that produce it (again taking into consideration market imperfections) than in countries without gold mines.