Question

A hamburger costs $8 in the United States and ¥960 in Japan. The nominal exchange rate is ¥110 per dollar. The inflation rates in the United States and in Japan are 2% and 4%, respectively. The purchasing power parity is _____ per dollar.

Answer 1

Answer:

122.4

Explanation:

The formula for calculating purchasing power parity is given below:

Exchange rate for the Purchasing power parity can be calculated using the below formula:

960/8=120¥ per $

ST = S0 × (1 + if/ 1 + id)

ST = Estimated spot rate at end of period

S0 = Current spot rate

if = period inflation rate in foreign currency

id = period inflation rate in domestic currency

ST=120 x (1+4%/1+2%)

   =120 x (1.04/1.02)

   =120 x 1.02

   =122.4 ¥ per dollar