Question

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?

Answer 1

Answer:

The price of Hockey Pucks in the United States is 74.55 U.S dollars.

Explanation:

Purchasing Power Parity (PPP) is said to hold when two currencies are in equilibrium (at par), and it is an economic theory that compares different currencies through an approach known as 'basket of goods approach'.

A PPP is said to exist when the same unit of good is priced the same in two different countries, taking into consideration the exchange rate of both currencies. PPP rates are considered more accurate measures than market exchange rates, because market exchange rates are influenced by several factors such as government intervention, different interest rates, speculation trading and edging.

PPP are also quite difficult to determine because of differences in purchasing habits, unequal qualities of the goods in the countries and differences in each country's economy, but once PPP is determined, it remains relatively constant over a long run.

Mathematically PPP is calculated as;

$S=\frac{P_1}{P_2}$ where;

S = exchange rate of currency 1 to currency 2 =

P₁ = cost of good X in currency 1

P₂ = cost of good X in currency 2

currency 1 = Canadian dollars

Currency 2 = U.S dollars

S = currency 1 : currency 2 = 1 : 0.71 = 1.4085

P₁ = 105 Canadian dollars

P₂ = ???

∴ $S=\frac{P_1}{P_2}$

$P_2=\frac{P_1}{S}$

P₂ = $\frac{105}{1.4085}$ = 74.55 U.S dollars.