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BX3031 Assignment - BX3031 BigMac Index Assignment Q1 What...

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BX3031 BigMac Index Assignment Q1 What is meant by the term purchasing power parity in its absolute sense? The spot exchange rate is determined by the relative prices of similar baskets of goods, assuming markets are efficient. Q2 Briefly explain the nature of the MacDonald’s Big Mac index including its role in relation to exchange rate prediction. MacDonald’s Big Mac index is a standard of how much a Big Mac cost in countries all over the world. It lists the price of Big Macs, the resulting PPP of the dollar and whether it is under or over valued against the U.S dollar. The index uses PPP theory with the Big Mac as the basket of goods to predict whether a currency is over or under valued in relation to the US dollar, which can give an indication of exchange rate movements (assuming efficient markets). PPP is a long-term indicator, pointing to where currencies ought to go in the future. Q4 On the hamburger standard, which of the currencies in the table is the most over- valued against the U.S dollar? Why do you think this might be so? The Norwegian Krone with a 77.1% over valuation. Domestic factors such as inflation, labour costs, differing standard of living, interest rates and the state of Norways economy may be contributing to an over valuation of 77%. Also the big mac index is based on US prices and assumes that US big macs are valued appropriately. Q5 On the hamburger standard, which of the currencies in the table is the most under- valued against the U.S dollar? Why do you think this might be so?
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