Question

The exchange rate of U.S. dollars for Canadian dollars is currently $1.00 = C$1.00. The U.S. and Canada allow their currencies to float. Suppose the price of a 2019 Audi A8 sells for $61,000 in the United States and C$82,000 in Canada. For purchasing power parity of the Audi sedan, what must this exchange rate become? Specifically, how many Canadian dollars must $1.00 U.S. dollar be able to buy? Provide your answer in Canadian dollars rounded to two decimal places. Use a negative sign "" for negative values. Do not include any symbols, such as "$."="*%," or "in your answer

Answer 1

For the purchasing power parity of the Audi A8, with prices at $61,000 in the U.S. and C$82,000 in Canada, the U.S. dollar to Canadian dollar exchange rate should be adjusted to $1.00 = C$1.34.

Step-by-step explanation:

To determine the exchange rate needed for purchasing power parity (PPP) of the Audi A8 based on its prices in the United States and Canada, we use the current prices in both countries. The car sells for $61,000 in the U.S. and C$82,000 in Canada. With an initial exchange rate of $1.00 to C$1.00, we calculate the new rate by dividing the Canadian price by the U.S. price.

The calculation is as follows: C$82,000 ÷ $61,000 ≈ 1.34426. This means that for purchasing power parity, $1.00 U.S. dollar should be able to buy approximately C$1.34. Therefore, the exchange rate should be $1.00 = C$1.34 for the prices of the Audi A8 in both countries to be equivalent.

In conclusion, for the PPP of the Audi A8, $1.00 U.S. dollar must be able to buy C$1.34. This calculation assumes no transaction costs, taxes, or other market frictions that can affect actual arbitrage activities.