FMF Chap07 Pbms Revisedw03

FMF Chap07 Pbms Revisedw03 - Problem 6.1 - 6.5 The Latin...

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Problem 6.1 - 6.5 The Latin American Big Mac Index: Historical April 1997 (1) (2) (3) (4) (5) Big Mac Actual Big Mac Implied Local currency Price in local exchange rate Prices in PPP of the under (-) / over (+) Country currency (April 7, 1997) dollars dollar valuation United States (dollar) 2.42 ---- 2.42 1.00 Argentina (peso) 2.50 1.00 2.50 1.03 3.3% Brazil (reais) 2.97 1.06 2.80 1.23 15.8% Chile (peso) 1,200 417 2.88 496 18.9% Mexico (peso) 14.90 7.90 1.89 6.16 -22.1% March 1999 (1) (2) (3) (4) (5) Big Mac Actual Big Mac Implied Local currency Price in local exchange rate Prices in PPP of the under (-) / over (+) Country currency (March 30, 1999) dollars dollar valuation United States (dollar) 2.43 ---- 2.43 1.00 Argentina (peso) 2.50 1.00 2.50 1.03 2.9% Brazil (reais) 2.95 1.73 1.71 1.21 -29.8% Chile (peso) 1,250 484 2.58 514 6.3% Mexico (peso) 19.90 9.54 2.09 8.19 -14.2% April 2002 (1) (2) (3) (4) (5) Big Mac Actual Big Mac Implied Local currency Price in local exchange rate Prices in PPP of the under (-) / over (+) Country currency (April 23, 2002) dollars dollar valuation United States (dollar) 2.49 ---- 2.49 1.00 Argentina (peso) 2.50 3.13 0.80 1.00 -67.9% Brazil (reais) 3.60 2.34 1.54 1.45 -38.2% Chile (peso) 1,400 655 2.14 562 -14.2% Mexico (peso) 21.90 9.28 2.36 8.80 -5.2% April 2005 (1) (2) (3) (4) (5) Big Mac Actual Big Mac Implied Local currency Price in local exchange rate Prices in PPP of the under (-) / over (+) Country currency April 2005) dollars dollar valuation United States (dollar) 3.06 ---- 3.06 1.00 Argentina (peso) 4.75 2.90 1.64 1.55 -46.5% Brazil (reais) 5.90 2.47 2.39 1.93 -21.9% Chile (peso) 1,500 594 2.53 490 -17.5% Mexico (peso) 28.00 10.84 2.58 9.15 -15.6% Notes: Column 3 = Column 1 ÷ Column 2; Column 4 = Column 1 ÷ Big Mac US$ Price; Column 5 = Column 4 ÷ Column 2. This textbook has used the Economist magazine's Big Mac Index for many years and many editions. Below are the Big Mac prices and actual exchange rates for select Latin American countries as printed in previous editions. Use the data to complete the calculation of the implied PPP value of the currency versus the U.S. dollar and the calculation as to whether that currency is undervalued (-%) or overvalued (+%) versus the U.S. dollar.
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Problem 6.6 Argentine Peso and PPP Assumptions Value Spot exchange rate, fixed peg, early January 2002 (Ps/$) 1.0000 Spot exchange rate, January 29, 2003 (Ps/$) 3.2000 US inflation for year (per annum) 2.20% Argentine inflation for year (per annum) 20.00% a. What should have been the exchange rate in January 2003 if PPP held? Beginning spot rate (Ps/$) 1.00 Argentine inflation 20.00% US inflation 2.20% PPP exchange rate 1.17 b. By what percentage was the peso overvalued? Actual exchange rate (Ps/$)
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This note was uploaded on 04/23/2011 for the course ECON 103 taught by Professor Econ during the Spring '11 term at Universitas Katolik Parahyangan.

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FMF Chap07 Pbms Revisedw03 - Problem 6.1 - 6.5 The Latin...

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