4. Table 3-1 in the text shows the percentage undervaluation or overvaluation in the Big Mac, based...
Question:
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 and in the long run, so that these deviations would be expected to disappear. Suppose the local currency prices of the Big Mac remained unchanged. Exchange rates in January 4, 2010, were as follows (source:
IMF):
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?
Step by Step Answer:
International Macroeconomics
ISBN: 978-1429241038
2nd Edition
Authors: Robert C. Feenstra ,Alan M. Taylor