Suppose that you are trying to decide between two job offers. One consulting firm offers you $150,000 per year to work out of its New York office. A second consulting firm wants you to work out of its London office and offers you £100,000 per year
The current exchange rate is $1.65/£. Which offer should you take, and why? Assume that the PPP exchange rate is $1.40/£ and that you are indifferent between working in the two cities if the purchasing power of your salary is the same.
We know from the extensive discussion in Question 8 that we should use the PPP exchange rate to compare the pound salary to the dollar salary. If we do so, we find $1.40/£ £100,000 = $140,000 . This is less than the $150,000 that you are being offered in New York. The fact that the dollar is undervalued on the foreign exchange markets makes the perceived salary of $1.65/£ £100,000 = $165,000, calculated with the spot exchange rate, seem more attractive. But, the key point is that to achieve $165,000 of spending in the United States, you would have to work in London and consume in New York.
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