Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.40 in the United States and 5.50 euros in Euro area. If the nominal exchange rate is .80 euros per dollar, the prices of which goods have prices that are consistent with purchasing-power parity?
A) both the tall latte and the Big Mac
B) the tall latte but not the Big Mac
C) the Big Mac but not the tall latte
D) neither the tall latte nor the Big Mac

Question

Quizplus · Accepted Answer

To determine which goods have prices that are consistent with purchasing-power parity, we need to convert the prices from one currency to the other using the nominal exchange rate:

- Tall Latte:
$4.00 = 4.00/0.80 = 5.00 euros
This means that the price of the latte in the US is higher than in the Euro area (3.20 euros), which violates purchasing-power parity. Therefore, choice A is incorrect.

- Big Mac:
$4.40 = 4.40/0.80 = 5.50 euros
The price of the Big Mac in the US is the same as in the Euro area, which is consistent with purchasing-power parity. Therefore, choice B is correct.

Therefore, the answer is B: the tall latte but not the Big Mac.

Suppose a Starbucks Tall Latte Cost $4