Us dollar and canadian dollar

Reference no: EM1311375

You are trying to decide whether to buy some laptop computers for your business in either Canada or in United States. Looking at identical machines on the Dell Canada and the Dell US web sites, you find that they sell for US $2000 (US dollars) in the United States and C$3,000 (Canadian dollars) in Canada

(i) Where would you buy the laptop computer if the exchange rate between the Canadian dollar and the U.S. dollar is U.S. $0.80 per Canadian dollar?

(ii) Where would you re-sell it if you wanted to make a profit? (Ignore any taxes, tariffs, transportation costs, and differences in quality).

(iii) Does purchasing power parity hold?

(iv) If many Canadian and American businesses acted like you, and if the exchange rate was flexible, what would happen to the value of the exchange rate?

(v) What would be the new equilibrium exchange rate that would make purchasing power parity hold for laptops, if the U.S. dollar price and the Canadian dollar price stayed constant?

Reference no: EM1311375

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