The Absolute Version of Purchasing Power Parity

Aim: To consolidate understanding of the absolute version of purchasing power parity

Duration: 1 hours

Prepare short answers to the questions below (a total of around 300 words):

1. Assume the consumer price index in France rises from 250 at the end of the year to 265 at the end of the next year, how much inflation was there in France during that year?
2. Describe the difference between a price level and a price index.
3. Outline the theory of absolute purchasing power parity.
4. During our discussion of absolute purchasing power parity we frequently referred to the law of one price. Write a short note on the logic of the law of one price and consider why this condition may be violated.