Chapter 1. Chapter 6 – Problem 7
Step 1
Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.
Question
Here is a table similar to Table 6-2 (but in alphabetical order) for the currencies of four imaginary nations. Use the theory of purchasing-power parity to fill in the blanks with a number or “NA” if the figure is not ascertainable from the information given.
| Price of | Exchange Rate (per Ronlandknut) | |||
|---|---|---|---|---|
| Country | Currency | Butterbeer | Predicted | Actual |
| Hagrid | Fluffy | sNXab94CJYegfGwnci8jH490FpwMhifR | 5 | 4 |
| Hermionia | Galleon | 25 | aGdBSvJZNdh+lYtvQ+2h6q0QeKcjz/D6 | 2 |
| Potterstan | Sickle | 80 | 8 | Q+CbuTTq/+WNtRnVCaB4JiRczD7wrGs6 |
| Ronland | Knut | 10 | nGqky1wr09lSKmoTQz1WzANtQRU= | nGqky1wr09lSKmoTQz1WzANtQRU= |
To determine the price of butterbeer in Hagrid, we use purchasing power parity to express the price of butter beer in Hagrid as being equal to the price in Ronland multiplied by the predicted PPP exchange rate. This gives a price of 50 fluffys. To determine the predicted PPP exchange rate in Hermionia, we use purchasing power parity to express the exchange rate as the ratio of the price of butterbeer in Hermionia to the price of butterbeer in Ronland. This gives a predicted exchange rate of 2.5. The actual exchange rate for Potterstan cannot be determined from the PPP relationship and generally will not be equal to the PPP predicted exchange rate. Since the country of Ronland uses the Knut as its currency, the value of the Knut in terms of Knut must always equal one. This is true for both the predicted PPP exchange rate and for the actual exchange rate. Valuing any currency in terms of itself must always yield an exchange rate of one. Review text pages 165-166 and case study on The Big Mac Around the World, for a discussion of purchasing power parity.
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