Asked by
Jonice Storer
on Nov 07, 2024Verified
The passage of the North American Free Trade Agreement (NAFTA) in 1994 sharply reduced trade barriers between Canada and Mexico. All else equal, the absolute PPP theory predicts that the exchange rate between the dollar and the peso will adjust to make the cost of goods in Mexico cheaper than the cost of identical goods in Canada.
NAFTA
The North American Free Trade Agreement, which was a treaty between the United States, Canada, and Mexico aimed at eliminating trade barriers between the countries.
Absolute PPP
Absolute Purchasing Power Parity, an economic theory suggesting that goods in different countries should have the same price when expressed in a common currency.
Trade Barriers
Measures that governments or public authorities introduce to make imported goods or services less competitive than locally produced goods and services.
- Comprehend the impact of international trade agreements on exchange rates and trade flows.
- Distinguish between the relative and absolute versions of purchasing power parity.
Verified Answer
YK
Learning Objectives
- Comprehend the impact of international trade agreements on exchange rates and trade flows.
- Distinguish between the relative and absolute versions of purchasing power parity.