Question: The following table shows the price of a Big Mac in a variety of countries and the nominal bilateral exchange rate between such countries and the United States in January 2017. Prices are denominated in local currencies (LOC); any exchange rate is expressed as LOC/$.
|
Country
|
Big Mac local price (LOC)
|
Exchange Rate (LOC/$)
|
Implied PPP exchange rate (LOC/$)
|
Big Mac dollar price ($)
|
Under/over valuation against $ (%)
|
|
United States
|
5.06
|
1
|
1
|
5.06
|
0
|
|
Euro Area
|
3.88
|
0.96
|
|
|
|
|
United Kingdom
|
3.09
|
0.83
|
|
|
|
|
China
|
19.60
|
6.93
|
|
|
|
|
Mexico
|
49
|
21.95
|
|
|
|
|
Japan
|
380
|
116.67
|
|
|
|
|
Switzerland
|
6.50
|
1.02
|
|
|
|
a) For each country, compute the implied PPP exchange rate, the dollar price of the local BigMac and quantify the resulting under/over valuation of the currency of interest against the U.S. dollar (in percentage terms). Please fill the table and report all intermediate steps in your solution sheet.
b) In which countries is the U.S. dollar weaker than the domestic currency? And stronger?