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- This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.
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- December 10, 2015 at 3:04 pm #290242
Hi,
From watching the OT lectures when calculating purchasing power parity. My understanding is:
If its Euro / $ 2 which means 2 Euro = $1. Therefore on the formula the $ is the base country.
Can I please check my understanding is correct on this BPP question.
The answer is Euro 2 x 103% / 104.5% = Euro 1.97
Inflation in European country is 3%
Inflation in home currency is 4.5%The question said home currency is 4.5% so would that mean 4.5% should be at the top?
Even though the question said home currency is 4.5%, should you still be looking at Euro / $ 2 and use the dollar % at the bottom)
Thanks
December 10, 2015 at 7:36 pm #290541This is actually question 102 i the current edition of the Revision Kit 🙂
The inflation figure to use on the bottom is what I call the base currency (because it starts with b 🙂 ) and this is the second currency in the quote – the currency being quotes against.
So since the quote is euro per $, it is $ that is the ‘base’ currency and is on the bottom of the equation, whereas euro is on the top.December 10, 2015 at 7:51 pm #290564Perfect. Thank you very much for the clarification.
Sorry, I’m using the old revision kit which is why the question numbers are different.
December 10, 2015 at 7:59 pm #290577You are welcome (and no problem 🙂 )
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