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Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the United States is $2.80 per pound and in Britain it is £3.70 per pound. According to PPP theory, what should $/£ spot exchange rate be?

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Answer:

Purchasing Power Parity Formula= 0.76

Explanation:

Giving the following information:

Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the United States is $2.80 per pound and in Britain, it is £3.70 per pound.

Purchasing Power Parity Formula= Cost of good in currency 1/ Cost of good in currency 2

Purchasing Power Parity Formula= 2.8/3.7= 0.76