Infrastructural Development in Various Countries

One might expect that countries that trade a great deal would have limited transport costs and barriers to trade, and therefore purchasing power parity would hold better between these countries. Germany and France exemplify two countries that are close, have had no legal barriers to trade after 1992, and since 1999 have shared a currency. Germany and Sweden are close and have not had barriers to trade either, but they have generally not had a fixed exchange rate. Finally, Germany and Japan are far apart, have barriers to trade between them, and do not share a fixed exchange rate. Look at the data on spot exchange rates and prices (CPIs) for these three pairs of countries and show how these different criteria affect the predicted results from PPP over the past twenty years.

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