Question

You are traveling on business in Japan. You land at the airport and change some of your

country's money into Japanese Yen (Japanese money). After you check into your hotel, you walk
down the street in Tokyo to a grocery store and buy 6 bottles of Coca-Cola to keep in your hotel room to drink while you are there. When you return to your hotel room you use your calculation to see how much money the Coca-Cola costs in your country's money. You realize that it costs about
30% more to buy the Coca-Cola in Japan. This difference in price is an example of __________.

a. The purchasing power parity
b. The balance of payments effect
c. Inflation effect in global trade
d. The variation in the consumption index between Japan and your country Coca-Cola increasing prices due to tariff effects
e. GNI of Japan compared to the GNI of your country

Answer 1

The 30% higher cost of Coca-Cola in Japan is an example of the concept of purchasing power parity, which accounts for differences in price levels between countries for similar goods and services.

Step-by-step explanation:

The difference in price you noticed for the Coca-Cola in Japan compared to your country's money can be attributed to purchasing power parity (PPP). The concept of PPP relates to the relative value of two countries' currencies based on the prices of similar goods and services in each country. When economists compare the GDP of different countries, they often use PPP exchange rates to account for differences in price levels, thus making international comparisons more meaningful.

For your scenario where the Coca-Cola costs 30% more in Japan, it's an example of how the exchange rate alone does not always reflect the true cost of goods and services due to varying price levels between countries. PPP takes this into account by equalizing the purchasing power of different currencies by considering the prices of a basket of goods that are internationally traded.