The appreciation or depreciation of currency in order to equalize the price of a Big Mac.

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Chapter 20, Problem 1E

To determine

The appreciation or depreciation of currency in order to equalize the price of a Big Mac.

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Suppose that yesterday, the U.S. dollar-Japanese yen exchange rate was $1=¥0.553546. The price of one Japanese yen in terms of a U.S. dollar was ___ . Suppose that today the U.S. dollar-Japanese yen exchange rate falls to $1=¥0.533585 for one dollar. This means that between yesterday and today, the U.S. dollar has ___ against the Japanese yen. The price of a Mexican peso in terms of the U.S. dollar is now ___ .

We discussed how costs of living are different in different countries and a mere conversion of currencies using exchange rates might not give a full picture of living comparisons. For that reason, we will use the Big Mac Index that was invented by The Economist in 1986 to guide whether currencies are at their correct level using the theory of purchasing power parity. The following Table 1 reports the price of a Big Mac from five countries as of Jan 12, 2021 and the corresponding official exchange rates. Use the information provided in Table 1 to fill out the rest of the information and answer the questions below: Table 1: PPP and Exchange Rates Country Price in local currency Exchange Rate Purchasing Power Parity (PPP) United States 5.66 1 Britain 3.29 0.74 Sweden 52.88 8.30 Norway 52 8.54 Mexico 54 20.11 Based on your calculations in Table 1, the PPP rate for Sweden is: 9.34 1.13 6.37 0.89 Which of…

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