Multinational Financial Management: Purchasing Power Parity Purchasing power par

Question

Multinational Financial Management: Purchasing Power Parity

Purchasing power parity is sometimes referred to as the law of -Select-one theoryone productone priceItem 1 . It holds that the same products cost roughly the same amount in different countries after taking into account the -Select-inflation rateexchange rateinterest rateItem 2 . This theory implies that the level of exchange rates adjusts so as to cause identical goods to cost the same amount in different countries. It assumes that market forces will eliminate situations in which the same product sells at a different price overseas. This relationship can be expressed as follows:

Ph = (Pf)(Spot rate)

or

Spot rate = Ph/Pf

Quantitative Problem: In the spot market, 2.47 Brazilian real can be exchanged for 1 U.S. dollar. An Apple iPad Air costs $610 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same iPad Air in Brazil? Round your answer to the nearest whole number. Do not round intermediate calculations.
  reals

Explanation / Answer

Answer

1 U.S. Dollar = 2.47 Brazilian real

610 U.S. Dollar = ?

If purchasing power parity (PPP) holds, then

Price of the same iPad Air in Brazil = $ 610 * 2.47

                                                              = 1506.7 Brazilian real

Answer : If purchasing power parity (PPP) holds, the price of the same iPad Air in Brazil should be 1506.7 Brazilian real.

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