Question

You own your own business and need to purchase some iPhones. You check out the Canadian and U.S. Apple websites and find identical phones. In the US the iPhone sells for US$720 while in Canada the price is C$1200.

1. Where would you buy the iPhone if the exchange rate between the Canadian dollar and the US dollar was US$0.75 per Canadian dollar? Provide calculations to support your answer.
2. If there is a profit opportunity, where would you resell it if you wanted to make a profit? (ignore any taxes, tariffs, transportation costs, and differences in quality.)
3. Does purchasing power parity (PPP) hold? Explain. If not, at what exchange rate does purchasing power parity hold?

Answer 1

Price of the iPhone in the US = US$720

Price of the iPhone in Canada = C$1200

Exchange rate is given as: C$1 = US$0.75

Price of the iPhone in Canada in US$ = C$1200 * US$0.75/C$ = US$900

The price of the iPhone is lower in the US compared to Canada. Therefore, in order to obtain profit, one has to buy iPhones in the US and resell the same in Canada.

At the given exchange rate, there is no purchasing power parity as the relative prices in the given countries are not the same.

If the purchasing power parity holds, then the exchange rate must be :

US$720 = C$1200

=> US$720/1200 = C$1

=> US$0.6 = C$1

The PPP exchange rate is US$0.60 per Canadian dollar.