A representative basket of goods costs $2500 in the United States. The same basket of goods costs £2000 in the UK. What can be deduced from this?
1 )
The £ sterling is 25% over-valued.
2 )
The £ sterling is 20% under-valued.
3 )
The purchasing power parity exchange rate of the £ sterling is $0.80 to the £.
The purchasing power parity exchange rate of the £ sterling is $1.25 to the £.
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