Suppose the spot price of British pound (GBP) is currently $1.25. You observe the price of gold in the U.S. and U.K. as follows: an ounce of gold is $1,875 in the U.S. and GBP1,650 in the U.K. Answer questions a) and b) below.

1. Based on the information you observe, what is the percentage difference in the price of gold between the two markets? If you could buy and sell gold in the absence of transaction costs or any other frictions, what would your profit per ounce of gold be?
2. If the purchasing power parity (PPP) holds in its absolute form, what must be the spot exchange rate in the absence of taxes, transaction costs or any other market imperfections?