The table below is taken from the Big Mac Index. After reviewing it, answer the questions listed below
Country
Big Mac Prices
in U.S.
dollars or local
currency
Official Exchange Rate (-)/(+)
Under/Over
Valuation against $, %
United States $3.73
China Yuan 14.5 6.65/$1
Norway Kroner 45 6.25/$1
Thailand Baht 70 32.3/$1
Mexico Peso 32 12.8/$1
What is meant by PPP? According to this table, which is the most overvalued and undervalued currency? Fill the last column showing under or over valuation of local currencies. Give reasons for your answer. What is the primary drawback of this index? How can this be used?
PPP stands for purchasing power parity, and this concept is used in adjusting national income data to improve comparability. The table shows by how much, in Big Mac PP terms, selected currencies were over- or undervalued at that time. The most overvalued currency is Norway. On the other hand the most undervalued currency is Thailand, followed by China and Mexico. It should be noted that the PPP-theory-based Big Mac index is too simplistic. Exchange rates are affected by different factors such as interest rate and monetary policies, not by price alone.
Country
Big Mac Prices
in U.S. dollars or local
currency
Official Exchange Rate (-)/(+)
Under/Over
Valuation against $, %
United States $3.73
China Yuan 14.5 6.65/$1 Under valued
Norway Kroner 45 6.25/$1 Over valued
Thailand Baht 70 32.3/$1 Under valued
Mexico Peso 32 12.8/$1 Under valued
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