Suppose that a typical basket of goods costs 400 pesos in Mexico and 25 pounds in Britain and that the market exchange rate is 25 pesos per pound.Using purchasing power parity, the appropriate exchange rate for comparing the incomes of the two countries is:
A)0.25 pesos per pound.
B)10 pesos per pound.
C)16 pesos per pound.
D)25 pesos per pound.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) suggests that the exchange rate should equalize the price of a basket of goods in two countries. Here, 400 pesos equals 25 pounds, so the PPP exchange rate is 400/25 = 16 pesos per pound.

Suppose That a Typical Basket of Goods Costs 400 Pesos