Answer to Question #58466 in Macroeconomics for Kabir

Question

Suppose that a Starbuck’s venti latte currently sells for $4.50 in the U.S. and SF4.00
in Switzerland. Make up a value for the exchange rate between the dollar and the
Swiss franc (expressed as francs per dollar) that leaves the dollar undervalued on
a Starbuck’s purchasing power parity basis. Then use your numbers to show that, at
this exchange rate, it would be cheaper to purchase coffee in the U.S. than in
Switzerland. (10 pts)

Answer 1

If a Starbuck’s venti latte currently sells for $4.50 in the U.S. and SF4.00 in Switzerland and if the exchange rate between the dollar and the Swiss franc 1 franc = 1.015 dollar leaves the dollar undervalued on a Starbuck’s purchasing power parity basis, then 1 cup of coffee will cost 4.00*1.015 = $4.06, which is lower, then the price of the same cup of coffee in the U.S.