In Order for the Condition E_$/HK$ = P_US/P_HK to Hold

question 18

Multiple Choice

In order for the condition E_$/HK$ = P_US/P_HK to hold, what assumptions does the principle of purchasing power parity make?

• A) Only that there are no transportation costs and restrictions on trade.
• B) Only that the markets are perfectly competitive, i.e., P = MC.
• C) The factors of production are identical between countries.
• D) No arbitrage exists.
• E) HK and the U.S. are perfectly competitive and there are no transportation costs or restrictions on trade.

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Definitions:

Depreciation

The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner.

Net Income

The net income of a company once all costs and taxes are deducted from the total revenue.

Rate of Return

The gain or loss on an investment over a specified period, expressed as a percentage of the investment's cost. It measures the profitability or efficiency of an investment.

Cost of Capital

The yield a corporation needs to generate from its investment endeavors to keep its market valuation stable and draw in financing.