Table 1: Big Mac prices and exchange rates

January 2013 July 2013 January 2014

P^US_$4.37 4.56 4.62

P^TRY_lira8.45 8.50 8.50

E_lira/$ 1.77 1.96 2.26

You are given the information in Table 1 about the price of Big Mac (BM) in Turkey and the USA and the exchange rate between Turkish lira and the US dollar. In Table 1, P^US_$ is the price of Big Mac in New York in US Dollars, P^TRY_lira is the price of Big Mac in Istanbul in Turkish liras, and E_lira/$ is the exchange rate de?ned as liras per dollar. Based on the information provided, please answer the following questions. Please use the space provided to show your work.

a. Calculate the price of Big Mac in Turkey in terms of US dollars for each of the given dates.

b. Calculate the amount of under/over valuation of lira against the US dollar for each of the dates given.

c. Using the results in part (b), indicate weather PPP implies depreciation/or appreciation of lira against the dollar over the next six months at each of the dates given?

d. Calculate the PPP implied lira-dollar nominal exchange rates at each of the dates given.

e. Calculate the actual depreciation/appreciation rates between January 2013 and July 2013 and between July 2013 and January 2014. State if the Big Mac index correctly predict the change in the nominal exchange rate between June 2013 and July 2013 and between July 2013 and January 2014. What does the results suggest for PPP in the short run?