Title: Violating purchasing power parity"
Description: "This paper demonstrates that deviations from the law of  one price are an important source of violations of absolute PPP across  countries.  Using highly disaggregated U.S.  export data, we document evidence of  systematic international price discrimination based on the local wage of  consumers in the destination market.  We show that most violations from absolute  PPP can also be explained by international differences in wages.  We find very  little additional explanation is due to differences in income per capita.   Developing and calibrating a model of pricing-to-market based on search  frictions and international productivity differences, we show that  pricing-to-market accounts for 62 percent of the relationship between national  price levels and income and 100 percent of the deviation from the law of one  price.  In contrast, the textbook Harrod-Balassa-Samuelson effect accounts for  the remaining 38 percent of the relationship between national price levels and  income"--Federal Reserve Bank of Philadelphia web site.
Subjects: Purchasing power parity