Suppose a given basket of goods and services costs 9 dollars in Australia and 5,400 baht in Thailand. If the exchange rate is 600 baht per Australian dollar, purchasing power parity implies that the:

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) implies that in the long run, the exchange rate between two currencies should move towards the rate that equalizes the prices of an identical basket of goods and services in any two countries. In this case, 9 Australian dollars can buy the basket in Australia, and the equivalent in Thailand is 5,400 baht. Given the exchange rate of 600 baht per Australian dollar, 9 Australian dollars convert to 5,400 baht (9 * 600 = 5,400), exactly matching the cost in Thailand. This indicates that the exchange rate has already attained its long-run equilibrium value according to PPP.

Suppose a Given Basket of Goods and Services Costs 9