A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800 euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has purchasing-power parity with the U.S.?

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) implies that the basket of goods should cost the same in each country when converted to a common currency. In Japan, 720,000 yen divided by 900 yen per dollar equals $800, matching the U.S. cost. In Belgium, 800 euros divided by 0.80 euros per dollar equals $1,000, which does not match the U.S. cost. Therefore, only Japan has PPP with the U.S.

A Basket of Goods Costs $800 in the U