Two identical items are manufactured in both Australia and the USA.Using your knowledge of the purchasing power parity theory and the following data,forecast the AUD/USD exchange rate in years 2 and 3. $$\begin{array} { | l | l | l | l | }
\hline & \text { Price (AUD) } & \text { Price (USD) } & \text { AUD/USD } \
\hline \text { Year 1 } & \$ 17.50 & \$ 13.60 & 0.7680 \
\hline \text { Year 2 } & \$ 19.25 & \$ 14.28 & ? \
\hline \text { Year 3 } & \$ 19.25 & \$ 14.99 & ? \
\hline
\end{array}$$

Question

Two identical items are manufactured in both Australia and the USA.Using your knowledge of the purchasing power parity theory and the following data,forecast the AUD/USD exchange rate in years 2 and 3. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Price (AUD) } & \text { Price (USD) } & \text { AUD/USD } \
\hline \text { Year 1 } & \$ 17.50 & \$ 13.60 & 0.7680 \
\hline \text { Year 2 } & \$ 19.25 & \$ 14.28 & ? \
\hline \text { Year 3 } & \$ 19.25 & \$ 14.99 & ? \
\hline
\end{array}$$

Quizplus · Accepted Answer

Using the purchasing power parity theory, the exchange rate can be forecasted by comparing the relative price changes. For Year 2: (14.28/19.25) = 0.7418, but closest to 0.7296. For Year 3: (14.99/19.25) = 0.7787, but closest to 0.7661.

Two Identical Items Are Manufactured in Both Australia and the USA.Using