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Purchasing power parity theory

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Suppose that a ton of steel currently sells for $4,000 in the United States, and for €2,000 in Germany. The exchange rate is €1 = $1.50, and it costs $500 to ship a ton of steel between the United States and Germany.

a. Can you get rich in this market? Why or why not? Explain.

b. In the long run, what would you expect to happen to the price of steel in the U.S. and Germany? What would be the price differential?

c. Assume that prices are fixed. According to Purchasing Power Parity Theory, how will exchange rates adjust?

Reference no: EM131699432

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