Question
The Economist, the British weekly publication, reports the Big Mac Index. It consists of comparing the cost of a Big Mac hamburger, the most famous
The Economist, the British weekly publication, reports the Big Mac Index. It consists of comparing the cost of a Big Mac hamburger, the most famous hamburger of the McDonald's restaurant chain, in all the countries where it is produced to compare the cost of living in each country and to know if the currencies are overvalued or undervalued for the US dollar. The following link presents the February 2022 report:
The Economist. (2023, January 27). Our Big Mac index shows how burger prices are changing. The Economist. https://www.economist.com/big-mac-indexLinks to an external site.
where you can see the price of the Big Mac in the country's currency and US dollars at the current exchange rate (located in the penultimate column). In addition, you can find the Implied Purchasing Power Parity (PPP) exchange rate, which is the exchange rate that equalizes the prices of hamburgers between countries. This parity exchange rate is obtained by dividing the cost of the Big Mac in domestic currency and the price of the Big Mac in US dollars. The difference between the PPP exchange rate and the spot exchange rate indicates the position of the domestic currency for the US dollar. If the difference is positive, it indicates that the domestic currency is overvalued, the US dollar. If it is negative, it indicates that the domestic currency is undervalued, the US dollar. Procedure
- Choose 5 countries from those presented in the following link:
By country | FRED | St. Louis Fed. (n.d.). https://fred.stlouisfed.org/categories/158Links to an external site.
- There you will find the time series of exchange rates, i.e., the US dollar price in each country. Choose the exchange rate for a specific year or month at the group's discretion.
- Choose two products marketed in each of these 5 countries that are either produced or created and patented in the United States (similar to the Big Mac). These products should not be close substitutes (be different). Briefly present the characteristics of the chosen products and if there are differences in each individual product between countries.
- Find the prices of those goods in each country's currency in the year or month you chose in part 2. Google.com is a good tool to find those prices.
- With all this information, compute the parity exchange rate (PPP) mentioned above and indicate whether the domestic currency is overvalued or undervalued concerning the US dollar. In total, you should have 6 countries, the United States plus the 5 you chose.
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