If the theory of purchasing power parity holds, then how much does an Egyptian tapestry cost in the United States if the same tapestry sells for 15,000 Egyptian pounds in Egypt and the exchange rate is $0.14 per Egyptian pound?

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity, the price of the same product should be equal in different countries when measured in the same currency after adjusting for the exchange rate. So, to find the cost of the tapestry in the United States, we need to convert the price in Egyptian pounds to U.S. dollars using the exchange rate:

15,000 Egyptian pounds x $0.14/Egyptian pound = $2,100

Therefore, the cost of the tapestry in the United States would be $2,100.

If the Theory of Purchasing Power Parity Holds, Then How