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What can explain the failure of relative PPP to hold in reality?
Answer: Government procedures of the price level differ from country to country.
One cause for these differences is that people living in different countries spend their income in different manners. For the reason that of this inherent difference between countries certain baskets will be affected more by price changes given their consumptions basket. For illustration consumers in country X eat more fish compared with consumers in another country. In excess of likely the government upon determining a commodity basket to reflect preference will have an overwhelming representation of fish in their basket. Any price level vary in the fish market will be felt particularly by country X and their overall price level will reflect this. Therefore the changes in the relative prices of basket components can cause relative PPP to become distorted.
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