Exchange Rate Determination Graded Assignment | Read Chapter 12 | Back to Assign

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Exchange Rate Determination Graded Assignment | Read Chapter 12 | Back to Assignment Due Friday 12.01.17 at 11:45 PM Attempts: Average: 14 4. Calculating the PPP using the Big Mac Index Aa Aa In April 2002, the price of a Big Mac in the United States was $2.49. Using data from The Economist's Big Mac Index for April 2002, the following table shows the local currency price of a Big Mac in several countries and the actual exchange rate. At the time, a Big Mac in the United Kingdom would have cost you 1.99 British pounds. The actual exchange rate between the pound and the dollar was $1.45 per British pound. The dollar price of a Big Mac in the United Kingdom was, therefore, 1.99 British pounds $1.45 per British pound = $2.89, which is more than you'd have paid in the United States. For the price you paid for a Big Mac in the United Kingdom, you could have purchased a Big Mac in the United States and had some change left over for french fries. Big Mac Index: April 2002 Country Argentina Brazil United Kingdom Euro zone Poland Switzerland Source: "Big Mac Index," The Economist, Apr. 25, 2002 Local Price 2.49 pesos 3.6 reais 1.99 pounds 2.67 euros 5.9 zloty 6.3 francs Actual Exchange Rate $0.32 per peso $0.43 per real $1.45 per pound s0.89 per euro $0.25 per zloty $0.60 per franc Purchasing power parity (PPP) theory states that exchange rates should equalize the prices of goods in any two countries. For the dollar price of a Big Mac to be the same in both countries, a U.S. citizen would need to be able to convert $2.49 into exactly 1.99 British pounds. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom $2.49 1.99 British pounds -$1.25 per British pound PPP Exchange Rate (U.S. dollars per British pound) = In April 2002, the dollar price of a Big Mac in Poland was less than the dollar price of a Big Mac in the United States What exchange rate would have equalized the dollar price of a Big Mac in the United States and Poland? That is, what is the PPP exchange rate for Big Macs? O $0.25 per zloty $0.42 per zloty O $2.49 per zloty $4.00 per zloty If exchange rates had been adjusted to bring about Big Mac PPP between the dollar and the zloty, the value of the zloty would have depreciated against the dollar, and the value of the dollar would have appreciated against the zloty QNA 3.16 © 2004-2016 Aona. Al nghts reserved Grade It Now Save & Continue 2013 Cengage Leaming except as roted. All rights reserved. Continue without saving Copyright NoticesTerms of Use Privacy NoticeSecurity NoticeAccessibility

Explanation / Answer

Dollar price of Big Mac in United States = $2.49

Price of Big Mac in Poland = 5.9 zloty

Exchange rate = $0.25 per zloty

Dollar price of Big Mac in Poland = 5.9 * $0.25 = $1.48

So,

In April 2002, the dollar price of a Big Mac in Poland was less than the dollar price of a Big Mac in the United States.

Calculate PPP exchange rate -

PPP exchange rate (US dollars per Zloty) = Price of Big Mac in US/Price of Big Mac in Polland

PPP exchange rate (US dollars per Zloty) = $2.49/5.9 zloty = $0.42 per zolty

The correct answer is the option (2).

In comparison to actual exchange rate ($0.25 per zolty), more dollars can be purchased with 1 zolty on basis of PPP exchange rate ($0.42 per zolty).

So,

If exchange rates had been adjusted to bring about Big Mac PPP between the dollar and the zolty, the value of zolty would have appreciated against the dollar, and the value of dollar would have depreciated against the zloty.

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