Question

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)

Answer 1

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

According to PPP,

Exchange Rate between the $H and the $ will be = The price of a Big Mac in the US/ The price of a Big Mac in the country of Hatchland

= 5.30/4,25

= $1.247/$H

.

Whereas, the exchange rate between the $H and the $ is $1.10/$H

This indicates that Hatch Dollars ($H) is undervalued and Dollar ($) is overvalued.

,

So, according to PPP the Hatch dollar is undervalued.