Question

B. KFC opened its first store in Accra, Ghana in October 2011. The price of a Wicked Zinger Meal in Accra is 39.90 GHS. In New York City, the price of a Wicked Zinger Meal is $9.65. The exchange rate between Ghanaian Cedi (GHS) and U.S. dollars is GHS1.6873/$. According to purchasing power parity, is the Ghanaian cedi overvalued or undervalued? To what extent? Show your calculation.

Show calculations as required.

Answer 1

Amount of USD required to purchase Wicked Zinger Meal of GHS 1 million = 1000000/39.90*9.65 = USD 2,41,855.

 

Amount of USD required to purchase GHS 1 million in exchange market = 1000000/1.6873 = USD 595,238

 

Thus, GHS is overvalued in exchange market by $0.35 per GHS.

 

How to arrive at $0.35 per 1 GHS?

 

>> Difference of USD 241,855 and USD 595,238 is USD 353,383 per 1 million GHS.

>> By extrapolation, 1 GHS is overvalued by USD 0.35.

 

Currently, as per Purchasing power parity, to purchase one GHS in exchange market, we have to pay $ 0.59 (1/1.68 = 0.59), whereas actual worth of 1 GHS is $ 0.24 (9.65/39.90 = 0.24). Thus GHS is overvalued in exchange market, by $0.35 per GHS (0.59 - 0.24 = 0.35)

Thus GHS is overvalued in exchange market, by $0.35 per GHS (0.59 - 0.24 = 0.35)