Question

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
Brazil (Real)	8.71			1.7248
United States (US$)	4.17			1.0269
Chile (Peso)	1750			499.348
China (Yuan)	13.2			6.7356

a. Compute the Big Mac prices in Canadian dollars for each country.

b. Compute the PPP exchange rate.

c. Compute the overvaluation or undervaluation of each country’s currency with respect to the Canadian dollar. A currency is considered to be overvalued if the nominal exchange rate is less than the PPP exchange rate. Overvaluation is the percentage difference between the nominal and the PPP exchange rate, computed using the following formula: [(PPP exchange rate – Nominal exchange rate) / Nominal exchange rate]*100.

Answer 1

PPP is calculated by dividing the price of Big Mac in local currency of the country by the price of Big Mac in Candian dollars
Big Mac price in Candian dollars = price of Big Mac in local currency of the country/ nominal exchange rate

	Big MAC		Big MAC
	local	nominal	Canada $	PPP	Overvaluation
Canada	3.73
Argentina	14	3.9525	3.54	3.75	-5%
Australia	4.35	1.0684	4.07	1.17	9%
Brazil	8.71	1.7248	5.05	2.34	35%
US	4.17	1.0269	4.06	1.12	9%
Chile	1750	499.348	3.50	469.17	-6%
China	13.2	6.7356	1.96	3.54	-47%