Question

Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of $0.022. Inflation in the U.S. is expected to be 3% during the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of the year to be:a.$0.023.b.$0.021.c.$0.020.d.None of the above

Answer 1

c. $0.020

Step-by-step explanation:

The computation of value of the baht is shown below:-

The price of an item today in US is 1 Dollar

The price of an item today in Thailand is 1 ÷ 0.022 baht

So, 1 Baht = 0.022 dollar

1 year after

The price of an item in US=1 × (1 + 3%)

=1.03 dollar

Now, The price of an item in Thailand

= 1 ÷ 0.022 × (1 + 10%) baht

= 1.03 dollar

1 baht = Price of an item in Thailand × 1 Baht ÷ (1 + Thailand expected percentage)

= 1.03 × 0.022 ÷ 1.1

= 0.0206 dollar

or 0.020 dollar

Therefore for computing the value of baht we simply applied the above formula.