Question

Suppose a price of a pair of shoes is $40 in the United States and 600 pesos in Mexico. What is the nominal exchange rate if purchasing-power parity holds?

Answer 1

The nominal exchange rate if the purchasing-power party holds is $1 exchanges for 40 pesos. The nominal exchange rate is defined as the number of units of the domestic currency that can be used to purchase a unit of a given foreign currency. Purchasing Power Parity, PPP, is an economic theory that uses what's called the "basket of goods approach" Basically, it creates a basket of goods that is worth the same amount of money in two or more different countries.