The American Shopper in Japan

You Got It! - At the market exchange rate, 120,000 yen is worth about $740, so one U.S. dollar buys approximately 162 yen. (120,000 ÷ $ 740)

Well Done! - At the market exchange rate, 120,000 yen is equivalent to approximately $740, so Jen would spend about $740 in Tokyo. The same watch costs about $1,000 in New York.

Good Job! - PPP states that identical goods should sell for the same price once prices are converted into a common currency using the market exchange rate.

Correct! - Assuming the retail price of the Seiko watch is representative of all goods and services, PPP implies that one U.S. dollar buys 120 yen (120,000 divided by 1000), but in the market it buys about 162 yen, so the U.S. dollar is overvalued.

That's Right! - PPP applies to tradable goods, but a Seiko watch's retail price includes non-tradable retail services. So, the higher U.S. retail price may simply reflect higher retail costs in New York, not an overvalued U.S. dollar.