On average, the cost of a Big Mac in the U.S. is $4.62 (Feb 2014) If purchasing power parity holds, how much should the Big Mac cost in China if the exchange rate is $1 = 6.14?

The actual average price of a Big Mac in China is approximately 16.6 RMB. How do you explain the difference between the price implied by PPP and the actual price?

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Tod ThielLv2

28 Sep 2019

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Analyse the current state of the financial markets. An amusing example of purchasing power parity is The Economist's Big Mac index. Under PPP, movements in countries' exchange rates should in the long-term mean that the prices of an identical basket of goods or services are equalised. The McDonalds Big Mac represents this basket. The index compares local Big Mac prices with the price of Big Macs in America. This comparison is used to forecast what exchange rates should be, and this is then compared with the actual exchange rates to decide which currencies are over and under-valued. Required: Select one currency from The Economist's Big Mac index. Conduct a secondary research on this currency and its recent trends. Analyse their historical 5 values and determine whether they have been over or undervalued based on the Big mac index

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aquamarinekoala68

You are given the following information on the Consumer Price Index (CPI) in three countries: US Japan UK Dec. 2010 138 1205 442 Dec. 2015 163 1335 557 In December 2010 the Yen/$ spot rate was Â¥83.0025/$, and the $/Â£ ex-rate was $1.5595/Â£. a. Calculate the average, annual compounded inflation rate in each country from Dec. 2010 to Dec. 2015, using a time value of money calculation on your financial calculator, based on the formula: PV (1 + i)n = FV. Round to 2 decimal places, e.g. 3.45%. b. If relative Purchasing Power Parity (PPP) is holding, should the USD have appreciated or depreciated against the Yen and Pound during this period? Why? How much per year for each currency? Explain in an essay with full sentences and use the relative PPP equation (from the lecture notes) in your answer: e = %INFus - %INFF c. If relative PPP holds, the ex-rates as quoted above will change annually according to the difference in inflation rates. In that case, what should the Â¥/$ and $/Â£ ex-rates (do not reverse the ex-rates) have been in December 2015? Assume that the exchange rate changes annually at a rate equal to the difference in inflation rates, and use a time value of money calculation on your financial calculator, based on the formula PV (1 + i)n = FV.

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