A certain car costs €50,000 in Greece and C$60,000 in Canada. If the current exchange rate...
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A certain car costs €50,000 in Greece and C$60,000 in Canada. If the current exchange rate is C$1.2/€, what is the profit an arbitrageur could earn per car (in terms of Canadian dollars) according to absolute PPP? Round intermediate steps to four decimals. Please show formula used and steps |
Homework Answers
Absolute Purchasing Power Parity refers to the fact that prices of a particular object is same across all the countries, however in reality it doesn't holds good due to different shipping costs, government policies and restrictions.
PPP refres to the fact that
exchange Rate (C$/EURO)= Price of Car in Canada/ Price of car in Greece
Here, Cost of car in Greece= € 50,000
cost of car in Canada= C$60,000
So as per absolute PPP, Exchnage rate= 60000/50000= 1.2
which is equal to the actual exchange rate.
Hence there is no scope of arbitrage as such arbitrage profit=0.
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