Question

Assume that the exchange rate between the United States and Japan is equal to 0.0086 $/yen. Pound of Tomatoes Pound of Carrots Pound of Cucumbers Pound of Green Beans Price in the United States $3.29 $3.50 $7.54 Price in Japan 382.72 yen 270.00 yen 876.74 yen $2.50 200.00 yen Round prices to two decimal places. In which of the markets below does purchasing power parity (PPP) hold? In the market of tomatoes. In the market of carrots. In the market of green beans. In the market of cucumbers.

Answer 1

Answer :In the market of tomatoes

Holding Purchasing power parity means that the price of a good should be equal in both countries such that price of tomatoes should be equal to $3.29 in both countries.

Here, 1 yen= 0.0086 dollars

So, as price of tomatoes in Japan is 382.72 yen, if converting it in terms of dollars results in $3.29( price in US) then PPP holds.

382.72 yen = 382.72*0.0086

= 3.29

Hence, PPP holds in the market of tomatoes