A hamburger costs $8 in the United States and ¥960 in Japan. The nominal exchange rate is ¥110 per dollar. The inflation rates in the United States and in Japan are 2% and 4%, respectively. The purchasing power parity is _____ per dollar.

Question

Quizplus · Accepted Answer

The purchasing power parity (PPP) exchange rate is calculated based on the relative prices of a similar basket of goods between two countries. In this case, a hamburger costs $8 in the US and ¥960 in Japan. To find the PPP, divide the price in Japan by the price in the US: ¥960 / $8 = ¥120 per dollar. This means, according to PPP, ¥120 should be equivalent to $1 for the prices of hamburgers to be equal in both countries.

A Hamburger Costs $8 in the United States and ¥960