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the percentage undervaluation or overvaluation in the Big Mac, based on exchange rates in July 2009. Suppose purchasing power parity holds and in the long run, so that these deviations would be expected to disappear. Suppose the local currency prices of the Big Mac remained unchanged. Exchange rates in January 4, 2010, were as follows

Country Per U.S.

Australia (A$) 0.90

Brazil (real) 1.74

Canada (C$) 1.04

Denmark (krone) 5.17

Eurozone (euro) 0.69

India (rupee) 46.51

Japan (yen) 93.05

Mexico (peso) 12.92

Sweden (krona) 7.14

Based on these data and  calculate the change in the exchange rate from July to January, and state whether the direction of change was consistent with the PPP-implied exchange rate using the Big Mac Index. How might you explain the failure of the Big Mac Index to correctly predict the change in the
nominal exchange rate between July 2009 and January 2010?

Econometrics, Economics

  • Category:- Econometrics
  • Reference No.:- M9479509

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