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Purchasing Power Parity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Purchasing Power Parity

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by LMR1006.
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  • November 20, 2023 at 6:51 pm #695159
    AmyDalton
    Participant
    • Topics: 1
    • Replies: 0
    • ☆

    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 !

    November 21, 2023 at 10:52 am #695190
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1505
    • ☆☆☆☆☆

    Spot 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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