determine the purchasing power of the country China for a consumer good that they would buy from their Canadian trading partner. Also, calculate what Canada’s purchasing power is with a country that they import from. See example below on Coca Cola and Mexico.

determine the purchasing power of the country China for a consumer good that they would buy from their Canadian trading partner. Also, calculate what Canada’s purchasing power is with a country that they import from. See example below on Coca Cola and Mexico.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 16RQ: Does a higher rate of return in a nations economy, all other things being equal, affect the exchange...

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Question

determine the purchasing power of the country China for a
consumer good that they would buy from their Canadian trading partner. Also, calculate what
Canada’s purchasing power is with a country that they import from. See example below on Coca Cola
and Mexico.

Purchasing Power Example

In the example of the picture, if a Canadian company operating in Mexico were to pay its Mexican employees
the equivalent of $10/hour CAD (or 100 pesos/hour according to our fictional exchange rate), the
Mexican employee would actually enjoy greater purchasing power (the ability to acquire 20 colas
versus only 10 colas) than his/her Canadian counterparts.

Country
Current exchange rate
Hourly wage rate at current exchange rate
(flexible)
Current cost of Coca-Cola in each country
Total number of colas that may be purchased
with one hour of work at current wages
(purchasing power)
Canada
$1 CAD
$10/hr CAD
1/can CAD
10 colas
Mexico
10 pesos MXN
100 pesos/hr MXN
5 pesos/can MXN
20 colas

Definition Definition Value of one unit of currency in terms of goods and services. Purchasing power refers to the ability of money to purchase goods and services at a particular point of time. As price levels in the economy increase, the purchasing power of one unit of currency decreases and vice versa.

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