The Economist magazine uses the price of a Big Mac to determine whether a currency is undervalued or overvalued. In July 2010, the price of a Big Mac was $3.73 in New York, 13.2 yuan in Beijing, and 6.50 Swiss francs in Geneva. The exchanges rates were 6.78 yuan per U.S. dollar and 1.05 Swiss francs per U.S. dollar.
a. Was the yuan undervalued or overvalued relative to purchasing power parity?
b. Was the Swiss franc undervalued or overvalued relative to purchasing power parity?
c. Do you think the price of a Big Mac in different countries provides a valid test of purchasing power parity?