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Scenario: Purchasing Power Parity
A car costs $30,000 in the United States and the exchange rate is $1 = £0.50. The same car costs £12,000 in Britain.
-(Scenario: Purchasing Power Parity) Look at the scenario Purchasing Power Parity. To have purchasing power parity, the pound must:

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Purchasing power parity states that the exchange rate between two currencies should adjust so that a basket of goods and services will have the same cost in both countries. In this scenario, the car costs $30,000, which is equivalent to £15,000 at the current exchange rate of $1 = £0.50. However, the car actually costs £12,000 in Britain, which means the pound is undervalued. To have purchasing power parity, the pound needs to appreciate so that the car costs £15,000, which is the same as it costs in the United States.

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