Suppose the peso price of a dollar was 12.2 pesos/$ in 2005 and 13.9 pesos/$ in 2008.

Question:

Suppose the peso price of a dollar was 12.2 pesos/$ in 2005 and 13.9 pesos/$ in 2008. With 2005 = 100, if the price index for Mexico was 125.2 in 2008 and that for the United States was 106.7 in 2008, was the dollar overvalued or undervalued in 2008 according to PPP? Explain.