The nominal exchange rate is .80 euros per U.S. dollar and a basket of goods in France costs 1,000 euros while the same basket costs $800 in the U.S. The nominal exchange rate is 1.2 Australian dollars per U.S. dollar and a basket of goods in Australia costs 960 Australian dollars while the same basket costs $800 in the U.S.. Which country has purchasing-power parity with the U.S.?
A) both France and Australia
B) France but not Australia
C) Australia but not France
D) neither France nor Australia

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) holds when the cost of a basket of goods is the same in two countries when expressed in a common currency. In Australia, 960 AUD / 1.2 = 800 USD, which matches the U.S. cost, indicating PPP. In France, 1,000 EUR / 0.8 = 1,250 USD, which does not match the U.S. cost, indicating no PPP.

The Nominal Exchange Rate Is