1.2. A basket of goods and services that costs $100 in the United States costs 800 pesos in Mexico, and the current nominal exchange rate is 10 pesos per U.S. dollar. Over the next five years, the cost of that market basket rises to $120 in the United States and to 1,200 pesos in Mexico, although the nominal exchange rate remains at 10 pesos per U.S. dollar. Calculate the following:

a. The real exchange rate now and five years from now, if today’s price index in both countries is 100

b. Purchasing power parity today and five years from now