I am trying to self-study and came across this question, I am not sure how to answer this.

I think I should transform all of the product's quoted prices to USD then compare them, is that correct?

The table below shows retail prices of a single product in three countries. Use the cross-rate table and state which country’s currency is relatively (i) under-valued, and (ii) over-valued.

enter image description here

  • 1
    $\begingroup$ You are on the right track. $\endgroup$
    – Alper
    Sep 24 at 18:10

That is the idea of the Big Mac Index. You have one product, and would like to figure out what the “fair” exchange rate is based on the theory (application) of purchasing-power parity (PPP). The link to the economist above shows a computation for the relative over- / under- valuation:

A Big Mac costs £3.49 in Britain and US$5.65 in the United States. The implied exchange rate is 0.62. The difference between this and the actual exchange rate, 0.73, suggests the British pound is 15.9% undervalued. 

You can look here to get an idea how inflation impacts exchange rates.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.