Over- or Undervalued? The Economist magazine uses the price of a Big Mac to determine whether a
Question:
Over- or Undervalued?
The Economist magazine uses the price of a Big Mac to determine whether a currency is undervalued or overvalued. In June 2020, the price of a Big Mac was $5.71 in New York, 21.70 yuan in Beijing, and 6.50 Swiss francs in Geneva. The exchange rates were 6.9 yuan per U.S. dollar and 0.94 Swiss francs per U.S. dollar.
a. Was the yuan undervalued or overvalued relative to purchasing power parity?
b. Was the Swiss franc undervalued or overvalued relative to purchasing power parity?
c. Do Big Mac prices in different countries provide a valid test of purchasing power parity?
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According to the theory of purchasing power parity PPP an item should cost the same everywhere once ...View the full answer
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