Pro Corp a USbased MNC uses purchasing power parity to forec

Pro Corp., a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of $o.o22. Inflation in the United States is expected to be scenario, Pro Corp. would forecast the value of the baht at the end of the year to be: O a. $0.023. b. $0.021 O c. $0.020. d. None of the above

Solution

The price of an item today in US is 1 Dollar

The price of an item today in Thailand is 1/0.022 baht

1 Baht=0.022 dollar

After 1 year

The price of an item in US=1*(1+3%)=1.03 dollar

The price of an item in Thailand=1/0.022*(1+10%) baht

So,

1/0.022*(1+10%) baht=1.03 dollar

=>1 baht=1.03*0.022/1.1=0.0206 dollar