While shopping in the Mexican market, you find that limes cost 11 pesos each. You remember that back home, they cost 80 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is

Question

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The Purchasing Power Parity Theory states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods in the two countries. In this case, the basket of goods consists of limes. The price of a lime in Mexico is 11 pesos, and the price of a lime in the United States is 80 cents. Therefore, the exchange rate should be 11 pesos/dollar or 7.3 cents/peso.

While Shopping in the Mexican Market, You Find That Limes