Purchasing power parity You are given the data in Table 3.17 on prices in local currency in the United States, Mexico, and England.

a. What are the rates of currency exchange suggested by the absolute version of the purchasing power parity doctrine? 

b. Would you be surprised to learn that the equilibrium exchange rates were 0.566 pounds per dollar and 11 pesos per dollar? 

c. Why might the PPP prediction for the peso be further off than for the pound? 

d. Now suppose that all prices doubled in the United States and tripled in England and Mexico in the next ten years. What would you predict the equilibrium exchange rates to be in ten years? 

e. How might real shocks to, say, the world price of wheat or oil modify your answer?

Transcribed Image Text:

Table 3.17 Purchasing power parity Country Shoes Hats Haircuts United States $20 $10 $5 England 10 10 3 Mexico N$200 N$100 N$20