1. CPP may not hold because:

(a) The prices for individual goods are sticky.

(b) Transaction costs increase the bounds on deviations from CPP, making it more difficult to arbitrage away price differences.

(c) Quotas and voluntary export restraints limit the ability to arbitrage across goods markets.

(d) Parallel imports lead to two different prices for the same good.

(e) The prices of tradable goods fluctuate too much, which makes it difficult to take advantage of arbitrage opportunities.

2. Absolute Purchasing Power Parity may not hold when:

(a) The prices of individual goods in the consumption bundle consistently deviate from CPP across two countries.

(b) It can be computed even if the consumption bundles of different countries are not the same (ie if the APPP rate cannot even be defined, theoretically).

(c) The prices for individual goods are sticky.

(d) There are tariffs, quotas, and voluntary export restraints.

(e) Competition is perfect.

3. Relative Purchasing Power Parity is relevant because:

(a) Empirical tests have shown that Absolute PPP is always violated, while Relative PPP is a good predictor of short-term exchange rate exposure.

(b) Consumption bundles are not always comparable across countries.

(c) Price levels are not stationary over time.

(d) Investors care about the real return on their international portfolio investments.

(e) Investors care about the nominal return on their international portfolio investments.