Question

The price of sooer balls in the United Statos is $30 and the price of soccer bails in Mexico is $450 pesos. If the theory of purchasing power parity is correct, the exchange rate should be:

a. $1 = 15 pesos
b. $1 = 10 pesos
c. $10=1 peso
d. $15=1 peso
e. None of the above exchange rates is correct

Answer 1

The correct answer is option a.

Step-by-step explanation:

The purchasing power parity theory states that the exchange rate between the currency of the two countries is determined through the relative value of a basket of goods.

The exchange rate will be in equilibrium when the purchasing power in both the countries will be the same, or the price of the basket of goods is the same in both the countries.

The price of soccer balls in the US is $30.

The price of soccer balls in Mexico is $450 pesos.

The exchange rate should be

=
`(450)/(30)`

= 15

This means that each dollar is equal to 15 pesos.