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A soda would cost 2 dollars in the USA, and the same soda costs 3.5 yen...

A soda would cost 2 dollars in the USA, and the same soda costs 3.5 yen in Japan. If the USA/JAP exchange rate is 1 USD = 2 JPY, then PPP (does/does not)_____________ exist. If it did, the soda would cost yen______________ in Japan.

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Answer #1

Ans. If Purchasing Power Parity is satisfied then,

Exchange rate (Yen/Dollar) = Price of soda in Japan/ Price of soda in USA

=> Thus, a $2 soda must cost,

Price if soda in Japan = 2*2 = 4 Yen

So, if purchasing power parity holds then, the $2 soda would cost 4 Yen in Japan.
Thus, purchasing power parity does not hold as price of $2 soda is 3.5 Yen in Japan not 4 yen.

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