Question

In: Economics

A Big Mac costs $5.25 in the United States, 32.55 pesos in Country X, and 53.55...

A Big Mac costs $5.25 in the United States, 32.55 pesos in Country X, and 53.55 rupees in Country Y.

a. The implied exchange rate for Country X is pesos per dollar.

b. The implied exchange rate for Country Y is rupees per dollar.

Suppose the official exchange rates are 9.4 pesos per dollar and 8.6 rupees per dollar. Based on this information:

c. the prices of goods in Country X are % (type the word higher or lower) than the U.S.

d. the prices of goods in Country y are % (type the word higher or lower) than the U.S.

e. Suppose real per capita income in the U.S. is $52,000, in Country X it is 200,000 pesos, and in Country Y it is 300,000 rupees.

Round these to the nearest whole number.

PPP adjusted real per capita income in country X is $ .

PPP adjusted real per capita income in country Y is $ .

Expert Solution

Cost of Big Mac:

US= $5.25, Country X= 32.55 pesos, Country Y= 53.55

a) The implied exchange rate is the rate that equalises the price of Big Mac in both the countries. It is also called the purchasing power parity (PPP).

The implied exchange rate for country X:

Implied exchange rate= 32.55/5.25= 6.2 pesos per dollar

b) The implied exchange rate for Country Y:

Implied exchange rate= 53.55/5.25= 10.2 rupees per dollar

c) Official exchange rate of country X= 9.4 pesos per dollar

Implied exchange rate of country X= 6.2 pesos per dollar

If the official exchange rate is higher than the implied exchange rate, the currency is under-valued.

The pesos was under-valued by 34.04%. [ (6.2-9.4/ 9.4)x 100= (-3.2/9.4)x100]

The prices of goods in Country X are 34% lower than the U.S.

d) Official exchange rate of country Y= 8.6 rupees per dollar

Implied exchange rate of country Y= 10.2 rupees per dollar

If the implied exchange rate is higher than the official exchange rate, the currency is over-valued.

The rupees is over-valued by 18.6% [(10.2-8.6/8.6)x100= (1.6/8.6)x100]

The prices of goods in Country Y are 18.6% higher than the U.S.

e) PPP adjusted real per capita income in country X is $ 32,258. [ 2000,000 pesos/ 6.2 pesos per dollar]

PPP adjusted real per capita income in country Y is $ 29,412. [ 300,000 rupees/ 10.2 rupees per dollar]

Rahul Sunny answered 9 months ago

Look up where the Big Mac index stands today. Where is the United States relative to...

Look up where the Big Mac index stands today. Where is the United States relative to other countries? Which are the most expensive and which are the cheapest countries? How would this index suggest that the U.S. dollar should move relative to these currencies in the future if you believed in long-run PPP?

Assume a Big Mac is $3 in the U.S. How much would the Big Mac cost...

Assume a Big Mac is $3 in the U.S. How much would the Big Mac cost in China? Conduct some research. Identify at least one difference between the typical menu offering in the U.S. and the menu offering in China. Be sure to provide a citation. Conduct some research. Identify a major fast-food competitor that McDonalds faces in China. Be sure to provide a citation. Conduct some research. Locate a video commercial for McDonalds in China. Identify at least one...

If McDonald’s doubles the price of Big Mac, its gross profit from Big Mac should also...

If McDonald’s doubles the price of Big Mac, its gross profit from Big Mac should also double. True or False?

A country uses bronze coins with denominations of 1 peso, 2 pesos, 3 pesos, and 5...

A country uses bronze coins with denominations of 1 peso, 2 pesos, 3 pesos, and 5 pesos, silver coins of denominations of 2 pesos and 5 pesos, and uses gold coins with denominations of 5 pesos, 10 pesos, and 20 pesos. Show work. a ) Find a recurrence relation for the number of ways to pay a bill of n pesos if the order in which the coins are paid matters b) How many ways are there to pay a...

Suppose that a Big Mac costs $5.00 in New York and SF30 in Geneva. Suppose further...

Suppose that a Big Mac costs $5.00 in New York and SF30 in Geneva. Suppose further exchange rate is $/ = $0.20/1SF. a.Calculate the purchasing power parity exchange rate between the Swiss franc and the dollar. b. Based on your calculation, is the SF overvalued or undervalued? Explain. c. Suppose now that a Big Mac costs 1.25 pounds in London while the spot rate exchange rate is $2.50. Is the pound overvalued or undervalued? Explain. d. Is the Big Mac...

Suppose that 0.91 Swiss francs trade for $1, in the U.S. a Big Mac costs $4.37,...

Suppose that 0.91 Swiss francs trade for $1, in the U.S. a Big Mac costs $4.37, and in Switzerland price a Big Mac costs 6.5 francs. (a) What is the value of the real exchange rate between the Swiss and the U.S. Big Mac? (b) Explain what the theory of purchasing-power parity implies. (c) If PPP held, what should be the nominal exchange rate between the Swiss franc and the US dollar? (d) Why is PPP not entirely true in...

Choose and research the cultural environment of a country that it is not the United States....

Choose and research the cultural environment of a country that it is not the United States. Appraise the cultural forces and implications of making business in this social culture

MXNUSD .047 in nominal currency exchange rate terms. A Big Mac costs $3.99 in the U.S....

MXNUSD .047 in nominal currency exchange rate terms. A Big Mac costs $3.99 in the U.S. and 50 Pesos in Mexico. Please select the correct answer. I. The Mexican Peso in undervalued. I am better off purchasing the Big Mac in Mexico. II. The Mexican Peso in undervalued. I am better off purchasing the Big Mac in the U.S. III. The Mexican Peso in overvalued. I am better off purchasing the Big Mac in Mexico. IV. The Mexican Peso in...

It is argued that if a rich high wage country such as the United States were...

It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?

It is argue that if a rich high wage country such as the United States were...

It is argue that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico’s. What do you think about this argument?