Good Evening,
wanted to double check the purchasing power parity, as the equation is:
Counter rate * Counter Inflation rate (1.inflation) / Base Inflation rate (1.inflation)
To my knowledge, if you have $1.80 = £1 - this means that the £ is the base and the $1.80 is the counter.
In ex 1 of chapter 22: $ = £1.70
To my understanding, the £1.70 is the counter, hence the inflation of UK is of the counter;right?
I am asking since the answer treats the £1.70 as the base. Could you kindly clarify please?
Thank you !
Ask the Tutor ACCA FM
Purchasing Power Parity
2y ago#1Spot rate *
1 + Infl rate in foreign currency \
1 + Infl rate in home currency
US$ : £
1.50 : 1
You are right
8% in the US. 5% in UK
1.50 * 1.08/1.05 = 1.5429
So the US have seen a large depreciation in their currency
They have to hand over 1.5429 now for every £1
Instead of 1.50
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