When the question says: Ratio of US Price Level/U.K. Price level => 1.5:1, do we assume 1.5 for UK and 1 for USD? or the other way around? any taker?
surely the same as an fx rate quote where gbp is the base at 1…so that would be 1.5 US to 1 Uk
/ = direct I think therefore 1.5 US to 1UK if it said US:UK then yea it will be 1.5/1 for UK/US However, what I have noticed and I think its done deliberately is that if they ever talk about currency rates (i.e. USD vs GBP/EUR) they always have the the USD worth less than the other 2 so it mimics the real world. I don’t think I have seen a question where they have had a USD worth more than GBP or a Yen worth more than a USD, etc
gangsta Wrote: ------------------------------------------------------- > When the question says: > > Ratio of US Price Level/U.K. Price level => 1.5:1, > > > do we assume 1.5 for UK and 1 for USD? or the > other way around? > > any taker? Ratio of US price / uk price = 1.5 / 1 you use PL ratio when you compute real exchange rate only so here’s an example: Nominal Dollar/Pound = USD 0.4 Real Exch Rate = Nominal x PL (foreign) / PL (Home ie: domestic) In this case, US is home since its in the numerator = 0.4 x PL (UK) / PL (US) = 0.4 x 1 / 1.5 = 0.2667 The only case where you take the numerator as Domestic is when you calculate real exchange rates; however, if you are calculating expected exchange rate and forward rate then the numerator would be home inflation rate, home interest rate respectively. I hope I helped…
thanks… this was in the AM mock and when I see A:B, my brain immediately thinks A goes in the denominator and B goes in the numerator. It would be nice for CFAI to say ratio is 1.5 but i guess they don’t make that easy…
gangsta Wrote: ------------------------------------------------------- > thanks… this was in the AM mock and when I see > A:B, my brain immediately thinks A goes in the > denominator and B goes in the numerator. It would > be nice for CFAI to say ratio is 1.5 but i guess > they don’t make that easy… Always think of it in real world sense. Is the GBP worth more or less than the USD and do products cost more or less in UK vs US
on the mock it says the Ratio of U.S. Price level / U.K. Price level is 1.5:1 (i.e., 1.5 to 1) so it makes sense in the solution to have US price level at 1.5 versus UK price level at 1.0 I don’t think they’re using exchange rate convention here…just stating a ratio