The U.S. and Mexico both produce orange juice. A gallon of orange juice sells in the U.S. for USD 5.75. An equivalent gallon of juice sells in Mexico for MXN 70. The spot rate is .09 USD/MXN. (a) According to purchasing power parity (PPP), what should be the USD/MXN exchange rate? (b) Take the U.S. as the domestic country. Calculate the real exchange rate, Rt. Which country is more efficient?

(c) The Mexican GDP per capita is MXN 95,000. Translate this amount to (nominal) USD and to PPP USD prices.

(d) Suppose the price of a gallon of juice in Mexico decreases to MXN 63 over the next year, while the price of an equivalent U.S. gallon of orange juice increases to USD 6.05. According to the linearized version of relative PPP, what should be the USD/MXN exchange rate one-year from now?

(e) Next year, the exchange rate is 12.8 MXN/USD. Generate a trading signal based on PPP.