Question

Please show all calculations and explain the answer in detail. If using Excel please show data.

practice #7

If the current exchange rate is 105 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 380 yen, then other things equal, the Big Mac hamburger in Japan is ______________ (over-valued/under-valued/fairly-valued).

Answer 1

The current exchange rate between Japanese yen per U.S. dollar is = 105 Japanese yen per U.S. dollar.

If price of a Big Mac hamburger in the United States is $3.41.

On the basis of exchange rate the price of a Big Mac hamburger in Japan should be -

(Converting dollars into Yen as 1 $ = 105 yen)

3.41 $ =  3.41 * 105 yen

= 358.05 yen

But the price of a Big Mac hamburger in Japan is 380 yen, it should be 358.05 yen, hence the Big Mac hamburger in Japan is over-valued.

Hope it helps!