(a) Define and compare absolute purchasing power parity and relative purchasing power parity. When a good or service costs the same abroad and at home, we say that the Law of One Price (LOOP) holds. Discuss why the LOOP may or may not hold using aged care and the wine industry (use Australia as the home country). (5 marks)
(b) If tourism is a non-tradeable sector, explain why national and sub-national economies (regions and cities) should be promoting tourism when an economy suffers a shock that affects the tradeable sector. (Hint: Use any or combination of the following to explain. Short- and long-run approaches to understanding the determination of the real exchange rate, relative prices and wages, real exchange rates, household preferences, tastes, income, and terms of trade). (5 marks)