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Brazil 2.1893 520(real india 46.6672 12,000(rupee

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Unformatted text preview: 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 In the previous table: • PPP holds only when the real exchange rate q US/F 5 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). • If q US/F , 1, then the basket in the home country is more expensive than the bas- ket in the United States. This implies the U.S. dollar is undervalued and the Home currency is overvalued. According to PPP, the Home country will experience a real depreciation (Brazil and India). 4. Table 3-1 in the text shows the percentage undervaluation or overvaluation in the Big Mac, based on exchange rates in July 2009. Suppose purchasing power parity holds in the long run, so that these deviations would be expected to disappear. Sup- pose the local currency prices of the Big Mac remained unchanged. Exchange rates in January 4, 2010, were as follows (source: IMF): Solutions n Chapter 3 Exchange Rates I: The Monetary Approach in the Long Run S-13 Country Per U.S. $ Australia (A$) 0.90 Brazil (real) 1.74 Canada (C$) 1.04 Denmark (krone) 5.17 Eurozone (euro) 0.69 India (rupee) 46.51 Japan (yen) 93.05 Mexico (peso) 12.92 Sweden (krona) 7.14 Based on these data and Table 3-1, calculate the change in the exchange rate from July to January, and state whether the direction of change was consistent with the PPP-implied exchange rate using the Big Mac Index. How might you explain the failure of the Big Mac Index to correctly predict the change in the nominal exchange rate between July 2009 and January 2010? Answer: (The complete table is included in the Excel workbook for this chap- ter in the solutions manual.) S-14 Solutions n Chapter 3 Exchange Rates I: The Monetary Approach in the Long Run Exchange rate (local currency Big Mac prices per U.S. dollar) Exchange Percent Over (+) / rate actual change under (–) Jan. 4, July 13, Actual, valuation 2010 (local 2009– In local In U.S. Implied...
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Brazil 2.1893 520(real India 46.6672 12,000(rupee Mexico...

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