by the help of example ,compute purchasing power parity
To compute purchasing power parity (PPP), we compare the cost of a basket of goods and services in two different countries using the exchange rate between their currencies. Here's an example using hypothetical data:
Let's compare the United States and Canada. We will consider the price of a Big Mac burger as a representative good.
Assuming the price of a Big Mac in the US is $5 and in Canada is CAD $7.5. The current exchange rate is 1 USD = 1.25 CAD.
To compute the PPP exchange rate, we divide the price of a Big Mac in Canada by the price of a Big Mac in the US:
PPP exchange rate = Price in Canada / Price in the US
PPP exchange rate = 7.5 CAD / $5
PPP exchange rate = 1.5 CAD per USD
Therefore, according to the PPP exchange rate, one Canadian dollar has the purchasing power of 1.5 US dollars.
This means that, in theory, if the exchange rate were in line with the PPP exchange rate, goods and services would cost the same in both countries when converted to a common currency. However, this is often not the case in reality due to various factors such as trade barriers, transportation costs, and non-tradable goods.