Suppose a Dell computer that sells for $2,000 in the U.S. is exported to Canada, where it sells for 2,500 Canadian dollars. Further assume that 1.5 Canadian dollars trade for one U.S. dollar in the foreign exchange market. According to the purchasing power parity theory, which of the following will occur?
a. Computers could be purchased in Canada for 2,500 Canadian dollars, and sold in the U.S. for $2,000 . The $2,000 in revenue from each computer sold could then be exchanged for 3,000 Canadian dollars, yielding a profit of 500 Canadian dollars for each computer sold (minus any transaction costs).
b. Computers could be purchased in the U.S. for $2,000 and sold in Canada for 2,500 Canadian dollars. The 2,500 Canadian dollars in revenue from each computer sold could then be exchanged for $3,000, yielding a profit of $500 for each computer sold (minus any transaction costs).
c. Purchasing power parity is achieved, and there is no profit to be had from reselling the computers.
d. The demand for computers would rise in both the countries and purchasing power parity would be achieved.
a
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