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PART EIGHT Topics in Corporate Finance

2. There must be no barriers to trading apples—no tariffs, taxes, or other political barriers such as voluntary restraint agreements (VRAs).

3. Finally, an apple in New York must be identical to an apple in London. It won't do for you to send red apples to London if the English eat only green apples.

Given the fact that the transactions costs are not zero and that the other conditions are rarely exactly met, it is not surprising that absolute PPP is really applicable only to traded goods, and then only to very uniform ones.

For this reason, absolute PPP does not imply that a Mercedes costs the same as a Ford or that a nuclear power plant in France costs the same as one in New York. In the case of the cars, they are not identical. In the case of the power plants, even if they were identical, they are expensive and would be very difficult to ship. On the other hand, we would be very surprised to see a significant violation of absolute PPP for gold.

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