Question

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: 

Country    Price of a Big    Predicted Exchange    Actual Exchange             Mac              Rate            Rate  Indonesia      30 500rupiah    rupiahstS        ]3 344rupiah$US  Hungary    900 forint      frinsUs          283 forints$US  Czech      70.0 koruna     korunaSUs        34.7 koruna$US  Republic  Thailand   08 baht         bałżUS           34.1 baht/$US  China      J7.0yuan        yuanSUS          6.21 yuan$US

a. For each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Recall that the U.S. price of a Big Mac was $4.79.) How well does the theory of purchasing-power parity explain exchange rates?

 b. According to purchasing-power parity, what is the predicted exchange rate between the Hungarian forint and the Chinese yuan? What is the actual exchange rate?

Answer 1

a)

Country	Price of a Big Mac (X)	Predicted exchange Rate (X/4.20)	Actual exchange Rate
Indonesia	30500 rupiah	6367.43 rupiah/$US	13344 rupiah/$US
Hungary	900 forint	187.89 forint/$US	283 forint/$US
Czech republic	70 koruna	14.61 koruna/$US	24.7 koruna/$US
Thailand	108 baht	22.55 baht/$US	34.1 baht/$US
China	17 yuan	3.55 yuan/$US	6.21 yuan/$US

from the above calculation, we can see that predicted exchange rate and actual exchange rates are not exactly the same thus Purchasing-power parity is not a precise theory of exchange rates

b) according to purchase power parity, the exchange rate of Hungarian forint to the Chinese yuan is (900/17) i.e 52.94 forints per Chinese yuan.
Hence, the required actual exchange rate is (283/6.21) i.e 45.57 forints per Chinese yuan.