Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is 200 pesos per barrel in Mexico, the price of oil is ________ per barrel in the United States.

Question

Quizplus · Accepted Answer

If purchasing power parity holds, then the relative value of the dollar and peso will be the same when buying a tradable commodity like oil or gold. Thus, since 2,400 pesos/ $300 = 8 pesos per dollar, the price of oil in the U.S. must be 200/8 = 25 dollars per barrel.

Suppose the Price of Gold Is $300 Per Ounce in the United