Question

Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the United States is $2.80 per pound and in Britain it is £3.70 per pound.

a. According to PPP theory, what should the dollar/pound spot exchange rate be?

Answer 1

0.7567

Step-by-step explanation:

Purchasing power parity (PPP) is an economic matrix used by economists to compare the standard of living between countries. It compares the countries' currency strength through their abilities to buy consumable goods.

The calculation of exchange rate E/ R using the PPP theory is by the formula below.

​E/R= ​P1/ P2

​​where:

E/R= Exchange rate of currency 1 to currency 2

P1​= Cost of good X in currency 1

P2​= Cost of good X in currency 2​

E/R = US Price / UK Price =

=$2.80 / £3.70

=0.7567

Exchange rate for dollar to the British pound is 0.7567