Question

A pair of Men's Burton lace-up dress shoes cost SAR 475 in Saudi Arabia but costs GBP 79 in England. Assuming that purchasing-power parity (PPP) holds,

how many SAR are required to purchase 1 GBP.

Answer 1

Let "R" be the rate to be derived

Let "S" be the cost of goods in Saudi Arabia in SAR

Let "G" be the cost of goods in England in GBP

As Purchasing Power Parity ( PPP) holds, PPP theory we can derive the exchange rate of the above two currencies. As per PPP theory different country currencies can be compared using common commodities/goods. According to this theory if a particular commodity is priced same in both countries then the underlined curriencies are said to be at par.

The formulae to derive the exchange rate is as follows:

R= S/G

Therefore R= 475/79

On solving the above we get R = 6.0127

Which means 6.0127 SAR would be require to purchase 1GBP.