Question

The British pound is currently trading at $1.26. Currently the price of a Big Mac in...

The British pound is currently trading at $1.26. Currently the price of a Big Mac in Great Britain Is £3.19 and the price of a Big Mac in the United States is $3.99. Calculate the real exchange rate for Big Macs between the two countries. Briefly explain what economic theory would predict would occur to prices in both countries and the nominal exchange rate if the exchange rate given your answer?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Real Exchange Rate = Price in US / Price in Britian

= $3.99/3.19

= $1.2507/£

the economic theory that happens to predict the real exchange rate and the prices is the purchasing power parity difference where the purchasing power parity estimates the exchange rate that should be ideal between the countries where the price levels of the basket of goods is considered. If the big Mac index is considered here and the real exchange rate is actually less than the nominal exchange rate. There would be slight increase in the price of big Mac in US or slight decrease in price of Britian if it were to equal the norminal exchange rate.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The British pound is currently trading at $1.26. Currently the price of a Big Mac in...
The British pound is currently trading at $1.26. Currently the price of a Big Mac in Great Britain Is £3.19 and the price of a Big Mac in the United States is $3.99. Calculate the real exchange rate for Big Macs between the two countries. Briefly explain what economic theory would predict would occur to prices in both countries and the nominal exchange rate if the exchange rate given your answer?
4. A Big Mac costs 190 rupees in India and $5.75 in the United States. If...
4. A Big Mac costs 190 rupees in India and $5.75 in the United States. If you use the Big Mac as a “basket” to measure the price level in a country, what should the $ / rupee rate be? If the actual rate is $ 0.015 / rupee , then is the rupee over or under valued? What is real exchange rate in US Big Macs per Indian Big Macs? (If you took a Big Mac in India, sold...
The Economist magazine uses the price of a Big Mac to determine whether a currency is...
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....
In the US, the price of a Big Mac is $3.5. In China, the price of...
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...
Question Set 7: Purchasing Power Parity and the Law of One Price The table below contains...
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....
Consider the following table, adapted from the Big Mac Index computed by The Economist magazine. The...
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...
Find the current prices of a Big Mac in China and U.S. Find the current nominal...
Find the current prices of a Big Mac in China and U.S. Find the current nominal exchange rate. According to the Big Mac Index, is RMB (or Chinese Yuan) currently overvalued or undervalued? By how much? (Show all the steps)
If the price of a Big Mac in the country of Hatchland is 4.25 Hatch dollars...
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)
Assume that the price of Big Mac in Japan is Yen750 while that in the United...
Assume that the price of Big Mac in Japan is Yen750 while that in the United States is $5.50. If the Yen-Dollar exchange rate is 125Yen/Dollar, what is the valuation of Japanese Yen?
The current dollar−pound exchange rate is $2 per British pound. A U.S. basket that costs $100...
The current dollar−pound exchange rate is $2 per British pound. A U.S. basket that costs $100 would cost $140 in the United Kingdom. For the next year, the U.S. Fed is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 15% per year. 1. (Scenario: Monetary Approach in the Long-run) What is the current U.S. real exchange rate with the United...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT