Suppose Caterpillar is selling a backhoe in the United State…
Suppose Caterpillar is selling a backhoe in the United States for $10,000 and the same piece of equipment is sold in Mexico for 120,000 Pesos. The currency exchange rate is $1= 10 Pesos. Assuming that there is no change in the price of the backhoes in the U.S. or in Mexico, PPP predicts that exchange rates will reach parity and will be:
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