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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
This 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.Perfect. Thank you very much for the clarification.
Sorry, I’m using the old revision kit which is why the question numbers are different.
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