Question

Sometimes, analysts use the price of specific products in different locations to compare currency valuation and purchasing power. For example, The Economist's Big Mac Index compares the purchasing power parity of many countries based on the price of a Big Mac. Using Google, locate the lastest edition of this index that is accessible. Identify the five countries and their currencies with the lowest purchasing power parity according to this classifcation. Which currencies, if any, are over valued?

Answer 1

Solution:

From the given data we know the Big Mac Price in $(P$) = 4.93

Now we calculate,

Five countries and the currencies

with the lowest purchasing power parity

Countries	Big Mac Price ($) P	PPP (P / P$)
Venezuala	0.66	0.66/4.93 = 0.133874	Lowest
Russia	1.53	1.53/4.93 = 0.310345
Ukraine	1.54	1.54/4.93 = 0.312373
South Africa	1.77	1.77/4.93 = 0.359026
India	1.9	1.9/4.93 = 0.385396

Therefore, the currencies of Sweden, Switzerland and Norway are overvalued according to the index.