AEM-ECON 2300 Prob Set 5 - 2010

# AEM-ECON 2300 Prob Set 5 - 2010 - ES(Bolivia) ED(U.S.)...

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ED(U.S.) ES(Bolivia) International Trade and Finance Professor David R. Lee AEM/ECON 2300 Spring 2010 Problem Set #5 Question 1: Purchasing Power Parity (30 pts) The "Big Mac Index" of The Economist magazine has been suggested as a rough approximation to estimating exchange rates and whether a given nation's currency is undervalued or overvalued. The tables below give pricing data from January 2010 “Big Mac Index” surveys conducted by The Economist . Using these data, we can derive the implied Purchasing Power Parity (PPP) and evaluate the actual exchange rate against the implied exchange rate. The notion of PPP implies that exchange rates in two countries should adjust towards the rate that equalizes the prices of a sample basket of goods in each country. Given the Big Mac price in local currency and in US \$, fill in the information for the actual exchange rate (local currency/US \$), the implied Purchasing Power Parity exchange rate (in terms of dollars), and the percent overvalued (+) or undervalued (-). (Note: Please round your answers to include only two decimal places) The Big Mac index (January 2010) Country Big Mac Price (local currency) Big Mac Price (in US \$) Actual exchange rate (1 US\$ =) PPP implied exchange rate % Overvalued or Undervalued United States \$ 3.58 3.58 1.00 1.00 +0.00% Australia AU\$ 4.30 3.98 1.08 1.20 +11.17% Britain £ 2.25 3.67 0.61 0.63 +2.51% Canada C\$ 4.08 3.97 1.02 1.14 +10.89% China Yuan 12.51 1.83 6.84 3.49 -51.12% France € 3.36 4.84 0.69 0.94 +35.20% Israel Shekel 13.82 3.75 3.69 3.86 +4.75% Mexico Peso 31.77 2.5 12.71 8.87 -69.83% Norway Kroner 39.75 7.02 5.66 11.10 +96.09% Russia

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## This note was uploaded on 08/12/2010 for the course AEM 2300 taught by Professor Lee,d.r. during the Spring '06 term at Cornell University (Engineering School).

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AEM-ECON 2300 Prob Set 5 - 2010 - ES(Bolivia) ED(U.S.)...

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