2. Assume that the average consumer in Mexico and the aver- age consumer in the
ID: 2495074 • Letter: 2
Question
2. Assume that the average consumer in Mexico and the aver- age consumer in the United States buy the quantities and pay the prices indicated in the following table: Food Transportation Services Mexico United Price 5 pesos $1 Quantity 400 1,000 Price 20 pesos $2 Quantity 200 2,000 States a. Compute U.S. consumption per capita in dollars. b. Compute Mexican consumption per capita in pesos. c. Suppose that 1 dollar is worth 10 pesos. Compute Mexico's consumption per capita in dollars. d. Using the purchasing power parity method and U.S. prices compute Mexican consumption per capita in dollars.Explanation / Answer
(a) Compute the U.S. consumption per capita in dollars.
Ans:- U.S. consumption per person = $1(1000) + $2(2,000)=$5000
(b) Compute Mexican consumption per capita in pesos.
Ans:- Mexican consumption per person=5(400) pesos + 20(200) pesos = 6000 pesos
(c) Suppose that 1 dollar is worth 10 pesos. Compute Mexico consumption per capita in dollars.
Ans:- From the U.S. point of view, the exchange rate (E)=10 pesos/$. Mexican consumption per person in dollars = 6000 pesos/E=$600
(d) Using the purchasing power parity method and U.S. prices, compute Mexican consumption per capita in dollars.
Ans:- Mexican consumption per person ($PPP)=$1(400)+$2(200)=$800
(e) Under each method, how much lower is the standard of living in Mexico than in the United States? Does the choice of method make a difference?
Ans:- Mexican standard of living relative to the United States: Exchange rate method: 600/5000 =0.12 PPP method: 800/5000=0.16 Yes, there is a difference
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