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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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PURCHASING POWER PARITY in the spot market, 15.4 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $8 in the United States, If purchasing power parity (PPP) holds, what should be the price of the same disc in Mexico?

Summary Introduction

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

Introduction:

Purchasing Power Parity (PPP):

It 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 $8.

The spot exchange rate of the one US dollar in the terms of the M country pesos is 15.4 M country pesos.

Formula to purchase power parity,

(Ph)=(Pf)×Spot rate

Where,

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

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