If a bottle of mineral water is priced at R8 in South Africa and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/rand exchange rate should be 5,760 yen/rand.

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, the exchange rate should equalize the price of the same good in different countries. If a bottle costs R8 in South Africa and 720 yen in Japan, the exchange rate should be 720 yen/R8, which is 90 yen/rand, not 5,760 yen/rand.

If a Bottle of Mineral Water Is Priced at R8