Studies Have Shown That the Price Elasticity of Demand for Necessities

question 173

Essay

Studies have shown that the price elasticity of demand for necessities, such as food, are higher in developing countries and lower in developed countries. What is the reason for this difference in elasticity?

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Definitions:

Foreign Price Level

A measure of the average prices of goods and services in a country relative to those in other countries, affecting exchange rates and purchasing power.

Real Exchange Rate

The rate at which a person can exchange the currency of one country for the currency of another and obtain the same quantity of goods.

Purchasing-power Parity

An economic theory that compares different countries' currencies through a "basket of goods" approach to assess relative currency value and living standards.

Nominal Exchange Rate

The Nominal Exchange Rate is the rate at which one country's currency can be traded for another's, not adjusted for inflation, reflecting the current value of one currency compared to another.