The Purchasing Power Parity And Monopoly Markets Questions & Answers Example

The purchasing power parity is statistical information we use to compare the prices of the products in the different countries. There are strong assumptions behind the use of the purchasing power parity. The theory assumes that all the countries have the similar production processes, and all the inputs have similar market structures. These are strong assumptions because all the countries cannot generate the same manufacturing process or similar market structures. In the developing countries, we observe that some monopolist producers are supported by the government to increase the competition power of the country in the international markets. Therefore, there might have monopolies in some countries for specific products while the other countries have free markets for the same product.
The monopolistic market structure contradicts with the assumptions of the purchasing power parity theory because this theory assumes a free market structure in all the countries. The free markets and the open economies can make the purchasing power parity theory meaningful. If there exists a monopoly market in one of the countries, it becomes impossible to compare the prices in the market of this country with the prices in the other countries’ markets. The monopolistic company creates barriers for the products coming from the other countries. Also, the production processes of the monopolistic company completely differ from the other companies producing the same product in the competitive markets.
The purchasing power parity theory can still be used in the existence of a monopoly in a country. Softening the strong assumptions of the purchasing power parity and developing slightly different assumptions might help us use a very close theory to the purchasing power parity. Under the existence monopoly condition, we can produce similar parameters to the original purchasing power parity.