Q. Explain why price levels are lower in poorer countries.
Answer: One theory explicate the difference in prices on different endowments of capital and employment Bhagwait, Kravis, and Lipsey the clarification is as follows:
• Rich countries have elevated capital-labor ratios while poor countries have a lot more labor relative to capital.
• For the reason that rich countries have high capital-labor ratios the MPL is greater and therefore they have a higher wage.
• Higher wages escort to higher disposable income and citizens' demand for goods will increase.
• For the reason that labor is cheaper in poor countries and is used intensively in producing non-tradable goods and these non-tradable goods will be cheaper in the poor countries than in the rich countries.
• The price of non-tradable goods will move with the increase in wages, therefore Increasing the price level of the goods.