The current cost of a representative "basket of goods" in Canada is 105 CAD. Assume absolute PPP...

Question:

The current cost of a representative "basket of goods" in Canada is 105 CAD.

Assume absolute PPP and an exchange rate of 0.1625 CAD/HKD.

What is the current cost of the same "basket of goods" in Hong Kong expressed in HKD?

Absolute Purchasing Power Parity (PPP):

The absolute purchasing power parity predicts that the cost of same basket of goods will be the same everywhere. The idea is very similar to law of one price. Law of one price states that the same good should be sold at the same price everywhere.

Answer and Explanation:

Purchasing Power Parity (PPP) holds when price levels in two countries are equal when expressed in common currency.

{eq}S_{CAD/HKD}=\frac{P_{CAD}}...

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Purchasing Power Parity & the Big Mac Index

from Business 308: Globalization & International Management

Chapter 7 / Lesson 10
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