If a case of mineral water is priced at €8 in the eurozone and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/euro exchange rate should be 5,760 yen/euro.

Question

Quizplus · Accepted Answer

According to purchasing power parity, the exchange rate should equalize the price of the goods in both countries. If a case of mineral water is €8 in the eurozone and 720 yen in Japan, the exchange rate should be 720 yen/€8 = 90 yen/euro, not 5,760 yen/euro.

If a Case of Mineral Water Is Priced at €8