Suppose the price of a standard pair of sport shoes is €40 in Spain and $75 in Canada,and the current exchange rate is 0.75 euro for one dollar.What is the purchasing-power parity exchange rate of the dollar?
A)0.40 euro/dollar
B)0.53 euro/dollar
C)0.75 euro/dollar
D)1.53 euro/dollar

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) exchange rate can be calculated as the ratio of the price of the same basket of goods in two different countries. Here the basket of goods is a standard pair of sport shoes. We have the following information: 
Price of sport shoes in Spain (Pₛ) = €40
Price of sport shoes in Canada (Pₙ) = $75
Exchange rate (ER) = 0.75 euro/dollar

Using the PPP formula we get, 
Pₙ/Pₛ = ER
$75/€40 = 0.75
1.875 ≈ 0.75  (as 0.75 euro/dollar)

Therefore, the PPP exchange rate of the dollar is €40/$75 = 0.53 euro/dollar. 
Hence, the correct answer is B.

Suppose the Price of a Standard Pair of Sport Shoes