Go to the website that contains the most recent calculations of the Economist’s Big Mac Index, http://www.economist.com/content/big-mac-index.

a. Plot the relationship between the local price of a Big Mac and the actual exchange rate. Does this plot suggest that there is a close relationship between the local price and the actual exchange rate? Does this suggest that the theory of PPP has some validity?

Explain why.

b. Does your evidence above indicate that PPP is a good theory for exchange rates in the short run?

c. Which country’s currency is the most overvalued in terms of purchasing power parity? Is it expensive or cheap to shop there?

d. Which country’s currency is the most undervalued in terms of purchasing power parity? Is it expensive or cheap to shop there?