Question: Traveling Down Under. Terry Lamoreaux owns homes in Sydney, Australia, and Phoenix, Arizona. He travels between the two cities at least twice a year. Because of his frequent trips, he wants to buy some new high-quality luggage. He has done his research and has decided to purchase a Briggs and Riley threepiece luggage set. There are retail stores in Phoenix and Sydney. Terry was a finance major and wants to use purchasing power parity to determine if he is paying the same price regardless of where he makes his purchase.
a. If the price of the three-piece luggage set in Phoenix is $850 and the price of the same three-piece set in Sydney is A$930, using purchasing power parity, is the price of the luggage truly equal if the spot rate is A$1.0941/$?
b. If the price of the luggage remains the same in Phoenix one year from now, determine the price of the luggage in Sydney in one year's time if PPP holds true. The U.S. inflation rate is 1.15% and the Australian inflation rate is 3.13%.