G D E Question 5: The Beer Standard (5 marks) M N In 1999 The Economist magazine reported the creation of an index, or standard, for the evaluation of African currency values using the local prices of beer. Beer, instead of Big Macs, was chosen as the product for comparison because McDonald's had not peneterated 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 militer bottle of clear lager beer across Sub-Saharan 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, in order to actually 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). The price is then converted to South African rand and the rand price compared to the local currency as one measure of whether the local currency is undervalued (-9%)or overvalued (+%) versus the South African rand. Use the data in the exhibit and complete the calculation of whether the individual currencies are under-or over-valued Beer Prices Local In Implied PPP rate Spot Rate Under er overvalued te rand (96) rand Country South Africa Botswana Ghana Kenya Malawi Mauritius Namibia Zambia Zimbabwe Beer Castle Castle Star Tusker Carlsberg Phoenix Windhoek Castle Castle Local currency Rand Pula Cedi Shilling Kwacha Rupee NS Kwacha ZS currency 2.30 2.20 1.200,00 41.25 18.50 15.00 2.50 1,200.00 9.00 0.75 379.10 10.27 6.96 4.00 1.00 340.68 6.15