If purchasing power parity holds and the nominal exchange rate is £1 for $2,then an iPhone that cost $450 in New York should cost _____ in London.

Question

Quizplus · Accepted Answer

According to the purchasing power parity (PPP) theory, the same goods should cost the same amount in different countries when prices are converted into a common currency. Since the nominal exchange rate is £1 for $2, an iPhone costing $450 in New York should cost £225 in London to maintain PPP.

If Purchasing Power Parity Holds and the Nominal Exchange Rate