C the mcdonalds big mac sold in the united states and

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c. The McDonald’s Big Mac sold in the United States and Japan Answer: q g US/FOREIGN 1 The McDonald’s Big Mac sold in the United States may sell for a different price compared with Japan because there are nontradable elements in the production of the Big Mac, such as labor and rent. d. Haircuts in the United States and the United Kingdom Answer: q g US/FOREIGN 1 Because haircuts cannot be traded across the United States and the United King- dom, consumers will not arbitrage away differences in the prices of haircuts in these two regions. 3. Use the table that follows to answer this question. Treat the country listed as the home country and the United States as the foreign country. Suppose the cost of the market basket in the United States is P US $190. Check to see whether purchasing power parity (PPP) holds for each of the countries listed, and determine whether we should expect a real appreciation or real depreciation for each country (relative to the United States) in the long run. Answer: See the following table. Note that the United States is treated as the foreign country relative to each “home” country listed in the table. S-12 Solutions Chapter 3 Exchange Rates I: The Monetary Approach in the Long Run Country Price of Is FX currency (currency Price of U.S. basket Real Is FX expected to measured market in FX exchange Does PP currency have Real in FX Per $, basket (P US times rate hold? overvalued or appreciation or units E FX/$ (in FX) E FX/$ ) q COUNTRY/US (yes/no) undervalued? depreciation? Brazil 2.1893 520 (real) India 46.6672 12,000 (rupee) Mexico 11.0131 1,800 (peso) South Africa 6.9294 800 (rand) Zimbabwe 101,347 4,000,000 (Z$) Country Price of Is FX currency (currency Price of U.S. basket Real Is FX expected to measured market in FX exchange Does PP currency have Real in FX Per $, basket (P US times rate hold? overvalued or appreciation or units E FX/$ (in FX) E FX/$ ) q COUNTRY/US (yes/no) undervalued? depreciation? Brazil 2.1893 520 415.97 0.80 No Real overvalued Real exchange rate (real) will depreciate India 46.6672 12,000 8,766.77 0.74 No Rupee overvalued Real exchange rate (rupee) will depreciate Mexico 11.0131 1,800 2,092.49 1.16 No Peso undervalued Real exchange rate (peso) will appreciate South Africa 6.9294 800 1,316.59 1.65 No Rand undervalued Real exchange rate (rand) will appreciate Zimbabwe 101,347 4,000,000 19,225,930.00 4.81 No ZW$ undervalued Real exchange rate (Z$) will appreciate
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In the previous table: PPP holds only when the real exchange rate q US/F 1. This implies that the bas- kets in the home country and the United States have the same price in a com- mon currency. If q US/F 1, then the basket in the United States is more expensive than the bas- ket in the home country. This implies the U.S. dollar is overvalued and the Home currency is undervalued. According to PPP, the Home country will experience a real appreciation (Mexico, South Africa, and Zimbabwe).
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