The equation for purchasing power parity is simple the domestic price should equal the exchange rate multiplied by the foreign price. So, suppose your shirt sells for 10 euros in Europe. If purchasing power parity holds, what should be the price of that same shirt in the United States if it takes 1.145 dollars to get one euro? All right, easy enough! Have an assignment of Picking a good that is bought and sold internationally…the only condition is that you can find the price in the United States and the foreign price online (e.g., the iPhone sold in Mexico versus the United States). Next, find the foreign price, domestic price, and the exchange rate before “testing” the degree to which purchasing power parity holds. Then discuss PPP and IRP with your peers!
