When a manufacturer has to transport a pleasant farther to arrive a bazaar, the retailer ofttimes adds the transportation fee to the Ending reward of the excellent. The farther out the bad has to expedition from its embryonic manufacturer, the higher the payment for the consumer living on account of marketplace. Due to the higher transportation costs, the purchasing potency of the dollar for the consumer living in the marketplace further away is less than the purchasing power of the dollar for the consumer living in a closer market.
The basic approach of purchasing dynamism parity idea or PPP relates to the purchasing faculty of a dollar. PPP relies on the valuation of goods and services remaining fixed across comparisons, regularly referred to as the regulation of one payment. Problems occur in PPP theories since issues such as transportation costs aspect into the valuation of goods and services, causing them to differ across comparisons.
Transportation Costs
The price for the same good in different markets is not constant and the PPP law of one price does not hold.Demand
Manufacturers often adjust the prices of goods according to the demand in specific markets to maximize profits. Economists call this practice pricing to market. When there is a high demand for a product in a specific market, manufacturers increase the price. When there is low demand, the manufacturer decreases the price. The PPP law of one price does not hold here because consumers living in high-demand areas have less purchasing power since the product is more expensive. Consumers living in low demand areas have increased purchasing power because the price for the same product is less expensive
Taxes
Taxes cause the final price of the same good to differ in different markets. In an area where sales taxes are higher, the consumer has less purchasing power because the final price of the good is higher. In areas where sales taxes are lower, the consumer has more purchasing power because the final price of the good is lower. The law of one price does not hold because of the differentiation in prices due to sales taxes.
