In the United States a representative basket of goods costs $4000.
At the current actual exchange rate between the US$ and the £ sterling the same basket of goods in the UK would cost $5000.
What can be deduced from this?
The £ sterling is 25% over-valued against the US$.
2 )
The £ sterling is 20% under-valued against the US$.
3 )
The purchasing power parity exchange rate of the £ sterling is $1.25 to the £.
4 )
The purchasing power parity exchange rate of the £ sterling is $0.80 to the £.
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