Answer Happy

Posted: **Thu May 26, 2022 7:12 am**

: A Consider A World That Only Comprises 2 Goods Good 1 Good 2 And 2 Countries Uk And Us Assume That Consumption W 1 (30.29 KiB) Viewed 16 times

: A Consider A World That Only Comprises 2 Goods Good 1 Good 2 And 2 Countries Uk And Us Assume That Consumption W 2 (20.26 KiB) Viewed 16 times

: A Consider A World That Only Comprises 2 Goods Good 1 Good 2 And 2 Countries Uk And Us Assume That Consumption W 3 (8.65 KiB) Viewed 16 times

(a) Consider a world that only comprises 2 goods (Good 1, Good 2) and 2 countries (UK and US). Assume that consumption weights of these goods for both countries be (0.25, 0.75). The price of the goods at time / are listed below: UK (GBP) US (USD) Good 1 20 25 Good 2 20 45 Note: GBP stands for British pound and USD stands for United States dollar. Let the spot exchange rate at time / be equal to 0.50 GBP/USD. Does absolute purchasing power parity (PPP) hold between the UK and the US?
(b) The price of the goods at time 1+1 are listed below: UK (GBP) US (USD) Good 1 22 25 Good 2 30 45 Using the information in (a), what spot exchange rate at time 1+1 does relative purchasing power parity (PPP) imply?
(c) Briefly discuss the role of PPP in the models for exchange rate determinations. Do the PPP relationships hold in the real world?