Suppose absolute purchasing power parity holds. The exchange rate between British pounds and Canadian dollars is £0.4825 per dollar. If a computer costs $2,995 in Canada, how much should it
Cost in Britain?

Question

Quizplus · Accepted Answer

Absolute purchasing power parity implies that the exchange rate should reflect the price level of the two countries, which in turn means that the prices of the same goods should be equal when measured in the same currency (after accounting for exchange rates).

Therefore, if a computer costs $2,995 in Canada, it should cost the same amount when converted to pounds using the exchange rate of £0.4825 per dollar.

2,995/0.4825 ≈ £6,207

Therefore, the correct answer is not D or E.

The answer should be less than £6,207 as the original price in dollars is less than $6,207.

A quick estimation based on the exchange rate would be to multiply $2,995 by 0.4825 to get an approximate price in pounds. This gives:

2,995 x 0.4825 ≈ £1,445

Therefore, the best choice is B.

Suppose Absolute Purchasing Power Parity Holds