8. Problems and Applications Q8 A case study in the chapter analyzed purchasing-

Question

8. Problems and Applications Q8 A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more countries: For each country, select the predicted exchange rate of the local currency per U.S. dollar. (Hint: Recall that the U.S. price of a Big Mac was $4.93.) Country Colombia Sri Lanka Russia Saudi Arabia France Price of a Big Mac 7,900 pesos 350 rupees 114 rubles 12 riyals 4.1C Predicted Exchange Rate Actual Exchange Rate 3,254 pesos/s 144 rupees/s 74.7 rubles/s 3.75 riyals/s 0.93 C/s According to purchasing-power parity, the predicted exchange rate between the Sri Lankan rupee and the euro is rupees per euro. However, the actual exchange rate is -rupees per euro.

Explanation / Answer

4.1/ 4.93 = 0.831 Euro/$

According to purchasing power parity , the predicted exchange rate between the Srilankan rupee and the euro is equal to = 350 rupees/4.1 Euro = 85.36 rupees per euro. However, the actual exchange rate is 144 rupees per dollar/ 0.93 uro per dollar = 154.838 rupees per Euro.

Country Predicted exchange rate = Price of Big Mac/ U.s Price of Big Mac Colombia 7900/4.93 = 1602.43 pesos/$ SriLanka 350/4.93 =70.99 rupees/$ Russia 114/4.93 = 23.123 rubles/$ Saudi Arabia 12/4.93 = 2.434 riyals/$ France

4.1/ 4.93 = 0.831 Euro/$

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