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The US and France both produce Cabernet. A bottle of wine sells in the US for $36. An equivalent bottle sells in France for 30.
The US and France both produce Cabernet. A bottle of wine sells in the US for $36. An equivalent bottle sells in France for 30.
a. According to PPP, what should be the $/ spot exchange rate?
b. Suppose the price of Cabernet in the US is expected to increase to $42 over the next year while the price of a comparable bottle of wine is expected to rise to 34. Would you predict the to appreciate or depreciate against the dollar?
c. If in one years time the prices are to be as expected, can you predict the spot rate in one year?
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