Question: In 1973, the GDP deflator was 15.6 in the United Kingdom and 34.3 in the United States (with 1995 = 100). In 2001, it was 116.1 in the United Kingdom and 112.1 in the United States. The exchange rate was £0.4078 to the dollar in 1973 and £0.6944 to the dollar in 1998.
(a) Calculate the rate of inflation in the United Kingdom minus the rate of inflation in the United States from 1973 to 2001 and compare it with the rate of depreciation of the British pound with respect to the U.S. dollar over the same time period.
(b) Did the relative purchasing-power parity (PPP) theory hold between the United Kingdom and the United States between 1973 and 2001? Why?