If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of purchasing power parity PPP) the same basket of goods in Europe should cost
Euros.

Question

Quizplus · Accepted Answer

According to PPP, the exchange rate should reflect the relative prices of goods between two countries. Therefore,
1 Canadian dollar = 1/1.40 euros = 0.7143 euros
Thus, the basket of goods costing $1000 in Canada would cost 1000/0.7143 = 1400 euros in Europe. Therefore, the correct answer is B, 714.29 euros.

If a Basket of Goods Costs $1000 in Canada and the Canadian