Question

Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is spam. In 2020, a can of spam cost 3 dollars in Ectenia and 27 pesos in Wiknam. What is the exchange rate between dollars and pesos?

1) 1 dollar = 3 pesos
2) 1 dollar = 9 pesos
3) 1 dollar = 27 pesos
4) 1 dollar = 81 pesos

Answer 1

The exchange rate between dollars and pesos is determined using purchasing-power parity by dividing the cost of a can of spam in Wiknam (27 pesos) by the cost in Ectenia (3 dollars), resulting in an exchange rate of 1 dollar = 9 pesos.

Step-by-step explanation:

The question asks for the exchange rate between dollars and pesos, given that a can of spam costs 3 dollars in Ectenia and 27 pesos in Wiknam. Using the concept of purchasing-power parity (PPP), which suggests that in the absence of transportation and other transaction costs, identical goods should have the same price in different countries when measured in a common currency. Therefore, the exchange rate is determined by the ratio of costs for the same good in both countries.

To calculate the exchange rate, divide the cost in Wiknam (27 pesos) by the cost in Ectenia (3 dollars), which results in an exchange rate of 9 pesos per dollar. Thus, the correct answer is: 1 dollar = 9 pesos.