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purchasing power parity

If the average price of goods in Europe rises from 100 in the year 2000 to 130 in the year 2010. If the average price of goods in the United States rises from 120 in the year 2000 to 140 in the year 2010. If the exchange rate in 2000 was 1 euro per dollar. If purchasing power parity held in 2000, what would purchasing power parity predict for the exchange rate in 2010?

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Initially in 2000, 100 USD = 100 euro
If we have 100 USD in 2000, we can purchase 100/100 = 1 unit of goods
If we hold the 100 USD into 2010, it is worth 100/130 = 0.769 unit of goods

If we have 1 ...

Solution Summary

This job reiterates purchasing power parity.

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