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a) Premier cigarettes are produced in Kenya and USA
a) Premier cigarettes are produced in Kenya and USA. It sells for USD 22 in the USA and Ksh. 34 in Kenya.
1) According to the theory of PPP, what should be the US dollar/Ksh. Spot exchange rate 2) Suppose the price of cigarettes is expected to rise to $ 27 over the next year, while its price in Kenya is expected to rise to Ksh. 44. What should be the one year forward US dollar /Ksh exchange rate be? b) Economic unions like the EAC, are bound to face several challenges unless certain tenets of regional economic integration are addressed right from the inception stage. Discuss
Expert Solution
A. Exchange rate between dollar and Kenyan currency is =[price in the United States / price in the Kenyan currency]= (22/.34)=64.70 Ksh
B. Forward exchange rate according to the purchasing price parity= (27/.44)= 61.36 ksh
C. Economic unions like EAC are facing several challenges because there are problems in association with the regional structure of management of the exchange rates and there are differences in the transparency of the exchange rate mechanism, so it is mostly related to the economic integration as the economy is not completely integrated with each other so there is a variation in the price.
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