(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in South Africa would be _____ rands.
A) 4,000
B) 40
C) 800
D) 8,000

Question

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in South Africa would be _____ rands. 
A) 4,000 
B) 40 
C) 800 
D) 8,000

Quizplus · Accepted Answer

PPP (purchasing power parity) means that the price of goods should be equal across countries when converted into a common currency using the nominal exchange rate. The nominal exchange rate between the US and South Africa is currently about 1 USD = 14.5 ZAR. Therefore, if PPP were to hold, the price of a computer in South Africa should be 500 USD/14.5 = 34.48 USD. To convert this to rands, we multiply by the nominal exchange rate: 34.48 USD * 14.5 ZAR/USD = 500.36 ZAR. Therefore, the best choice is C, 800 rands (rounded to the nearest whole number).

(Table: Exchange Rates and Prices) Suppose a Computer Costs $500