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Is naira under-valued or over-valued against the cedi

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Reference no: EM132410941

Suppose a common basket of goods costs is GHS53 in Ghana, N4500 in Nigeria and K$1200 in Kenya. The actual spot exchange rates for the Nigerian naira (N) and the Kenyan shilling (K$) are respectively N80/GHS and K$25/GHS.

Given the information above and assuming that the law of one price holds:

  1. Is naira under-valued or over-valued against the cedi (GHS)?
  2. Is Kenyan shilling under-valued or over-valued against the cedi (GHS)?
  3. One can often observe a gap between actual exchange rates and those predicted by the law of one price. Briefly discuss possible reasons that contribute to the persistency of the exchange rate gap

Reference no: EM132410941

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