Question

of Delsey suitcase costs $40 in the United States and 14360 in Japan, what is the estimated exchange rate of the yen per dollar if absolute purchasing power parity condition holds true? A. $ 1 Y109 B. X1 = $0.0091 C. X174,400 = $1 D. $109 = 1

Answer 1

To know the exchange rate between US & Japan, we must know the Concept of Absolute Purchasing Power Parity.

Absolute Purchasing Power Parity: According to this, if we are going to buy same goods in two different countries it will cost the same regardless of the difference in the currencies of the two countries.

This concept is also known as the law of one price.

In the above given question, absolute purchasing power parity holds true.

From the information provided in the question we have,

Price of Delsey suitcase in Dollar = $40

Price of the same suitcase in Yen = ¥4360

Now, we have to calculate exchange rate between US & Japan.

$40 = ¥4360

therefore, $1 = ¥4360 / 40 = ¥109

Hence, $1 = ¥109 is the estimated exchange rate between Yen & Dollar.

Hence, option (A) is correct.