Assume that the information in Table 19-1 applies to the cost per ton of coal in 1998.Assume that also over a 10-year period prices rise 100 percent in Great Britain and 200 percent in the United States.According to the purchasing power parity theory, the exchange rate between the dollar and the pound in the year 2008 will be

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According to purchasing power parity theory, the exchange rate between two countries' currencies should equal the ratio of the two countries' price levels. If prices rise 100% in Great Britain and 200% in the United States over a 10-year period, the ratio of prices in the two countries will be 2:1 in 2008. Therefore, the exchange rate should be 1 pound = 2 dollars (or 1 dollar = 0.5 pounds).

Assume That the Information in Table 19-1 Applies to the Cost