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Exchange Rate using purchasing power parity (PPP)

Suppose a market basket of goods costs $2000 in the United States and the exact same basket of goods costs Euro ?1500 in Germany.
a) What is the purchasing power parity exchange rate?

1$=______? Ans. Show work here:

Suppose the actual exchange rate was $1 = ?1 even though the price of the same basket is indicated above..

b) What would one expect the dollar and the euro to do over a period of time? (state up, down, stay same for each reflecting relative value change)

$_______ Euro______

Make sure you set up correctly and that your answer makes logical sense.

Solution Preview

Suppose a market basket of goods costs $2000 in the United States and the exact same basket of goods costs Euro  ?1500 in Germany.
       Make sure you set up correctly and that your answer makes logical ...

Solution Summary

The expert calculates exchange rates using purchasing power parity (PPP).

$2.19