Question

In the US, the price of a Big Mac is $3.5. In China, the price
of a Big Mac is ￥12.

a. What is the exchange rate of Chinese Yuan under purchasing
power parity?

b. What is the dollar price of Big Mac in China, if the actual
exchange rate is $0.15/￥?

c. Is the Chinese Yuan overvalued or undervalued? By how
much?

d. If China’s GDP in 2018 is ￥80 Trillion, what is its Nominal
GDP in USD (use actual rate)? What is its Real GDP in USD (use PPP
rate)?

Answer #1

GIVEN THAT :-

According to the question we have ,

US, the price of a Big Mac is $3.5.

China, the price of a Big Mac is ￥12.

TO FIND :-A. What is the exchange rate of Chinese Yuan under purchasing power parity?

PPP Exchange Rate = 12Yuan / 3.5

= Yuan 3.4286 per Dollar

OR

=$ 1/ 3.4286 per Yuan I.e. 0.29166 Yuan.

TO FIND :-B. What is the dollar price of Big Mac in China, if the actual exchange rate is $0.15/￥?

Dollar Price in China

= Yuan 12 * 0.15

= 1.8 $

.Dollar Price in China=1.8 $.

TO FIND :-C. Is the Chinese Yuan overvalued or undervalued? By how much?

==> = 0.15 - 0.29166 / 0.29166

= -0.4857

OR

=-48.57%

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The Economist magazine uses the price of a Big Mac to
determine whether a currency is undervalued or overvalued. In July
2017, the price of a Big Mac was $5.30 in New York, 19.80 yuan
in Beijing, and 6.50 Swiss francs in Geneva. The exchange rates
were 6.79 yuan per U.S. dollar and 0.96 Swiss francs per U.S.
dollar.
The price of a Big Mac in different countries _______ provide a
valid test of purchasing power parity because _______.
A....

Consider the following table, adapted from the Big Mac Index
computed by The Economist magazine. The table shows prices of a Big
Mac in local currencies and the current nominal exchange rate
between the local currency and the Canadian dollar.
Country
Big Mac Price
In local currency
Implied PPP
Rate +
Today’s Exchange rate
IC $=
Over (+)/ Under (-) Valuation against the C$, % ++
Canada (C$)
3.73
1.0000 , ----
Argentina (Peso)
14
3.9525
Australia (A$)
4.35
1.0684...

Assume the price of a Big Mac in the U.S. is $5.99 and the
price in Turkey is 29 Turkish Lira (TRY). Thus, according to PPP
and the Law of One Price, at the current exchange rate the TRY
is: A. undervalued B. Insufficient information to answer this
question C. correctly valued D. overvalued

If the price of a Big Mac in the country of Hatchland is 4.25
Hatch dollars ($H4.25), the price of a Big Mac in the US is $5.30,
and the exchange rate between the $H and the $ is $1.10/$H,
assuming a Big Mac is a good representation of the cost of goods in
both countries, according to PPP is the Hatch dollar overvalued,
undervalued, or correctly valued. Please show your calculations to
prove your argument. (4 points)

In Norway, a Big Mac costs 65 Norwegian Krone (NOK), while in
the United States, the average cost is $5.71. The implied
(Purchasing Power Parity) exchange rate is ___________. The current
exchange rate is NOK 9.09/$. The $ cost of a Big Mac in Norway at
the current exchange rate is ___________. The NOK is
_____________.
Group of answer choices
NOK11.3835/$; $7.15; 25.2% overvalued.
NOK11.3835/$; $7.15; 25.2% undervalued.
NOK 11.3835/$; $5.71; correctly valued.
None of the above.

1.Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in
Switzerland. You are told that the exchange rate between $ and CHF
is CHF=$0.5 From what you know about PPP theory and Law of One
Price, the swiss franc is ____________ (undervalued/overvalued/just
right)
2.Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in
Switzerland. You are told that the exchange rate between $ and CHF
is CHF=$0.5 From what you know about...

Question Set 7: Purchasing Power Parity and the Law of One
Price
The table below contains the price of a Big Mac in different
countries in the world in January 2017[1]. You will use the
information in the table to explain how Big Macs would be traded
between countries if Big Macs could be traded among countries.
Country
Big Mac Price
Purchasing Power Parity Exchange Rate
Actual
Exchange Rate
Actual Price in U.S. Dollars
United States
$5.10 (U.S.)
1.0 U.S....

Sometimes, analysts use the price of specific products in
different locations to compare currency valuation and purchasing
power. For example, the Big Mac Index compares the purchasing-power
parity (PPP) of many countries based on the price of the Mic Mac.
Locate the latest edition of this index that is accessible.
Identify the five countries (and their currencies) with the lowest
purchasing-power parity according to this classification. Which
currencies, if any, are overvalued?

Suppose Big Mac costs 120 pesos in Mexico City and 6 pounds in
London. If the current exchange rate is 25 pesos per pound, then
according to law of one price, pound is ______ and should _______
in the long run.
undervalued; appreciate
overvalued; depreciate
overvalued; appreciate
undervalued; depreciate

The important implication of purchasing power parity theory (for
our purposes) is in regard to nominal exchange rates (and changes
in these rates). If purchasing power parity theory is true, we can
use price differences (or price level differences more broadly) in
two countries to make a prediction of what the nominal exchange
rate “should be”. If a Big Mac costs 300 yen in Japan and $3.25 in
the U.S., what should be the nominal exchange rate of yen per...

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