Suppose a given basket of goods and services costs 6 dollars in the United States and 4,500 won in Korea. If the exchange rate is 900 won per dollar, purchasing power parity implies that the:

Question

Quizplus · Accepted Answer

Purchasing power parity implies that the exchange rate should equalize the price of the basket in both countries. At 900 won per dollar, the basket costs 5,400 won in Korea (6 dollars * 900 won/dollar), which is more than the 4,500 won it actually costs. Therefore, the dollar must depreciate to make the basket cost the same in both countries.

Suppose a Given Basket of Goods and Services Costs 6