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Fundamentals Of Financial Manageme...

10th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337902571

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BuyFindarrow_forward

Fundamentals Of Financial Manageme...

10th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337902571
Textbook Problem

PURCHASING POWER PARITY In the spot market, 19.1 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same disc in Mexico?

Summary Introduction

To find: The price of same disc in the M country.

Purchasing Power Parity (PPP) refers to the relationship, which indicates the same cost for same kind of products in the market of various countries after adjustment of the exchange rates of currencies. This relationship of common price can be termed as the law of one price.

Explanation

Given information:

The cost of disc in the U country is $15, the 19.1 Country M pesos is exchanged for $1.

The formula for purchase power parity:

  (Ph)=(Pf)×Spot rate

Where,

  • Ph is price of product in home country.
  • Pf is price of product in foreign country.

Note: Assume the home country in the given situation is the U country

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