If the price of wheat is $4 per bushel in the United States and £2 per bushel in Great Britain, what should the exchange rate be according to the purchasing power parity theory?

Explanation

According to purchasing power parity, the exchange rate should equal the ratio of the prices of the same good in the two countries. Since wheat costs $4 per bushel in the US and £2 per bushel in Great Britain, the exchange rate should be $4 divided by £2, which equals $2 per pound.