The model you’ve described (hidden quality differences) is a huge part of it, yes. I’ll try and find the paper, but in general nominal/market exchange rates tend to be stronger predictors of most objective, cross-comparable outcomes than indices that try to control for cost of living (PPP). If two goods/services that look equivalent are selling for different prices, it’s usually (though not always) because there’s some difference you’re not able to measure.
The model you’ve described (hidden quality differences) is a huge part of it, yes. I’ll try and find the paper, but in general nominal/market exchange rates tend to be stronger predictors of most objective, cross-comparable outcomes than indices that try to control for cost of living (PPP). If two goods/services that look equivalent are selling for different prices, it’s usually (though not always) because there’s some difference you’re not able to measure.