1. Briefly explain the intuition behind the Balassa-Samuelson model.

(b) Consider the following national prices at time t in countries A, B, and C:

	A	B	C
	45	100	150
Exchange Rate (A/B):	0.4500

(i) Does absolute purchasing power parity (PPP) hold between country A and country B?

(ii) Now consider countries A and C. What exchange rate would be consistent with absolute PPP?

(c) You are now given the following time t+1 information:

From time t, the national price index for country A has gone up to 55

From time t, the national price index for country B has gone up to 125

The time t+1 exchange rate (A/B) is 0.4240

Does relative PPP hold between country A and B?