Terry Lamoreaux has homes in Sydney, Australia and Phoenix, Arizona. He travels between the two cities...

Terry Lamoreaux has homes in Sydney, Australia and Phoenix, Arizona. He travels between the two cities at least twice a year. Because of his frequent trips he wants to buy some new, high quality luggage. He's done his research and has decided to go with a Briggs & Riley brand three-piece luggage set. There are retails stores in both Phoenix and Sydney. Terry was finance major and wants to use purchasing power parity to determine if he is paying the same price no matter where he makes his purchase.

If the price of the 3-piece luggage set in Phoenix is $725 and the price of the same 3-piece set in Sydney is $865, using purchasing power parity, is the price of the luggage truly equal if the spot rate is A$1.0759/$?

b. If the price of the luggage remains the same in Phoenix one year from now, determine what the price of the luggage should be in Sydney in one-year time if PPP holds true. The US Inflation rate is 2.25% and the Australian inflation rate is 3.36%.

Expert Solution

As per purchasing power parity theory

Future rate(A$/$)=Spot rate*[(1+Inflation in A$ currency)/(1+Inflation in $ currency)]

jeff jeffy answered 2 years ago

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