Answer to Question #276747 in Macroeconomics for Anna

Question

Given that purchasing power parity holds, what would be the price of oil in terms of Peruvian sols. Use the following information for your calculations:

Gold = $300 per ounce in U.S.

Gold = 2,400 sols per ounce in Peru

Oil = $25 per barrel in U.S.

A. 3.125

B. 96

C. 250

D. 200

Answer 1

$Purchasing power Parity= \frac{Cost of good X in country 1}{Cost of good X in country 2}$

$Purchasing power Parity= \frac{Cost of gold in US}{Cost of gold in Peru}=\frac{300}{2,400}=0.125$

When purchasing power parity is held, then the price of oil in terms of Peruvian sols will be;

$=\frac{25}{Cost of oil in Peru}=0.125$

$Cost of oil in Peru=\frac{25}{0.125}=200Peruvian sols$

$=200 Peruvian sols$