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    Using the PPP theory on the price of beef in Great Britain & the United States

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    Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the U.S. is $2.80 per pound and in Britian it is £3.70 per pound. (PLEASE - Do not take this question unless you have provided detailed answers and reasoning for each part)

    A) According to PPP theory, what should the $/£ spot exchange rate be?

    B) Suppose the price of beef is expected to rise to $3.10 in the United States and to £4.65 in Britain. What should the one-year forward $/£ exchange rate be?

    C) Given your answers to parts a and b, and given that the current interest rate in the United States is 10 percent, what would you expect the current interest rate to be in Britain?

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    Solution Preview

    Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the U.S. is $2.80 per pound and in Britian it is £3.70 per pound. (PLEASE - Do not take this question unless you have provided detailed answers and reasoning for each part)

    A) According to PPP theory, what should the $/£ spot exchange rate be?
    According to PPP
    $/£ spot exchnage rate = ...

    Solution Summary

    You will find the answer to this puzzling question inside.

    $2.49

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