Paf Is a Small Country

question 5

Essay

Paf is a small country. Its currency is the pif and the exchange rate with the U.S. dollar was 2 pifs
per dollar in 1980. The inflation indexes in 1980 were equal to 100 in the United States and in Paf. Twenty years later, the inflation indexes were equal to 400 in the United States and 200 in Paf. The current exchange rate is 0.9 pifs per dollar.
a. What should the current exchange rate be if PPP prevailed?
b. Is the Pif over/undervalued according to PPP?

---

Definitions:

Unit Product Cost

The total expense incurred to produce, manufacture, or acquire a product divided by the number of units.

Absorption Costing

An accounting technique that allocates all manufacturing costs to products, helping to capture the full cost of producing each item.

Total Period Cost

The sum of all expenses incurred by a business within a specific period, including both fixed and variable costs.

Absorption Costing

An accounting technique that integrates all costs associated with production, including direct materials, direct labor, and variable and fixed overhead costs, into the cost of a product.