Suppose that two countries, Britain and the U.S. produce just one good - beef. Suppose that the price of beef in the U.S. is $2.80 per pound, and in Britain it is £3.70 per pound.
According to PPP theory, what should the $/£ spot exchange rate be?
Suppose the price of beef is expected to rise to $3.10 in the U.S. and to £4.65 in Britain. What should be the one year forward $/£ exchange rate?