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6. In 1999, the Economist reported the creation of an index, or standard, for the evaluation of African currency values using the local prices of

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6. In 1999, the Economist reported the creation of an index, or standard, for the evaluation of African currency values using the local prices of beer. Beer was chosen as the product for comparison because McDonald's had not penetrated the African continent beyond South Africa, and beer met most of the same product and market characteristics required for the construction of a proper currency index. Investec, a South African investment banking firm, has replicated the process of creating a measure of purchasing power parity (PPP) like that of the Big Mac Index of the Economist, for Africa. The index compares the cost of a 375 milliliter bottle of clear lager beer across sub-Sahara Africa. As a measure of PPP the beer needs to be relatively homogeneous in quality across countries, needs to possess substantial elements of local manufacturing, inputs, distribution, and service, to provide a measure of relative purchasing power. The beers are first priced in local currency (purchased in the taverns of the local man, and not in the high- priced tourist centers), then converted to South African rand. The prices of the beers in rand are then compared to form one measure of whether the local currencies are undervalued (- %) or overvalued (+%) versus the South African rand. For each country/currency, use the data in the exhibit below to: Estimate the APPP exchange rate (rand per local currency unit); Calculate whether the individual currencies are under-or over-valued; Calculate the real rate of exchange (equiv. of rand per local currency unit); Rand revenue per bottle exported by Castle; and Domestic unit bottle sales needed in South Africa to match the rand revenue from one exported bottle. To answer this question, complete the table below. Beer Prices Name of local currency In local currency Bank rate (rand/local) Rand_2,30 Country South Africa Botswana Zambia Zimbabwe Brewery Co. Castle Castle Castle Castle Pula Kwacha z$ 2.20 1,200.00 9.00 1.3369 0.0029 0.1626 APPP rate (rand/local) % Over-valued (rand/local) Real rate, R (rand/local) Rand per Unit Export # Bottles in S Africa = Revenue 1 Bottle Exported Country South Africa Botswana Zambia Zimbabwe

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