Read chapter 8 of SUW (Schmitt-Grohe, Uribe and Woodford, 2016) and pay attention to how the concepts listed below are used to explain the standards (costs) of living, trade and other forms of engagement among countries.

1. The law of one price (LOOP)
2. Purchasing power parity (PPP), absolute PPP, relative PPP
3. The real exchange rate
4. Tradeable versus non-tradable goods
5. Home bias
6. Price indices.

Task 1

Define and discuss the concepts listed briefly. In your discussion, explain how each concept could affect trade and other economic activities in the Hunter region of New South Wales, Australia. Assume any of the following roles in your discussion (i) leading the Hunter Chamber of Commerce, (ii) leading the Hunter Regional development committee or (iii) leading a business that depends local and foreign customers. (Hint: Hunter is a regional economy with tourism, winery, education, and coal among its key economic or business attractions).