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459hw05

# 459hw05 - What is the percentage change in the dollar value...

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Brigham Young University Department of Economics Economics 459 - International Finance Homework #5 Due 2/22 Name: Purchasing Power Parity 1. Suppose that consumers in two countries, A & B each consume three different goods. Imagine the prices and the wieghts in the market basket are given as follows: A B Price weight Price weight Good 1 \$50 20 £25 25 Good 2 \$200 15 £100 10 Good 3 \$500 1 £250 1 Assuming the exchange rate is \$2 per £, does the law of one price hold for each good? What is the dollar value of a country A basket? What is the dollar value of a country B basket? Does absolute purchasing power parity hold? Why or why not? 2. Now imagine that there is a general inflation of 100% in country A but none in country B and prices change to the following values: A B Price weight Price weight Good 1 \$100 20 £25 25 Good 2 \$400 15 £100 10 Good 3 \$1000 1 £250 1 Assuming the exchange rate changes to \$4 per £, does the law of one price hold for each good?

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Unformatted text preview: What is the percentage change in the dollar value of a country A basket? What is the percentage change in the dollar value of a country B basket? Does absolute PPP hold now? Comparing question 1 with question 2, does relative PPP hold? Why or why not? 3. Now, instead of a general inflation, imagine that there is an increase in the price of only one good, so that prices look like the following: A B Price weight Price weight Good 1 \$150 20 £75 25 Good 2 \$200 15 £100 10 Good 3 \$500 1 £250 1 Assuming the exchange rate changes stays at \$2 per £, does the law of one price hold for each good? What is the percentage change in the dollar value of a country A basket? What is the percentage change in the dollar value of a country B basket? Does absolute PPP hold now? Comparing question 1 with question 3, does relative PPP hold? Why or why not?...
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459hw05 - What is the percentage change in the dollar value...

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