Suppose that the exchange value of the dollar equals 2 British pounds.If in San Francisco a computer costs $1,000 and in London it costs 2,000 pounds,then
A) British consumers will buy computers in San Francisco
B) Americans will buy computers in London
C) purchasing power parity prevails
D) purchasing power parity does not prevail

Question

Quizplus · Accepted Answer

Purchasing power parity prevails when the exchange rate between two currencies is equal to the ratio of the prices of a basket of goods in the two countries. In this case, the exchange rate is 2 pounds per dollar, and the price of a computer in San Francisco is $1,000, while the price of a computer in London is 2,000 pounds. This means that the ratio of the prices of computers in the two countries is 1:2, which is the same as the exchange rate. Therefore, purchasing power parity prevails.

Suppose That the Exchange Value of the Dollar Equals 2