Assume that $1 can buy you either ¥107 or £.55. If a TV in London costs £500,what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

Question

Quizplus · Accepted Answer

According to the absolute purchasing power parity (PPP) theory, exchange rates should adjust to equalize the purchasing power of different currencies. Therefore, the price of the same basket of goods (such as a TV) should be the same in different countries, once the exchange rate is taken into account.

In this case, the price of the TV in London is £500. We can use the exchange rates given to compute the price of the TV in yen:

£1 = ¥107/0.55 = ¥194.54
£500 = ¥97,270

Therefore, the answer is (C) ¥97,273.

Assume That $1 Can Buy You Either ¥107 or £