4. In recent years China has been routinely accused of currency manipulation. In this question you are asked to use the freely available finder.com Starbucks Index to investigate these claims. Go to http://www.finder.com/starbucks-index to access the most recent version of their data. a. What is the most recent price of a Starbucks tall latte in China? What is the implied yuan/dollar exchange rate based on these prices? b. Does this measure suggest that the Chinese yuan is overvalued or undervalued relative to the dollar? Why might this be beneficial to the Chinese economy? c. The fundamental assumption of this index is that the cost of producing a Starbucks tall latte is identical across countries. Why might this assumption be violated? How might this violation affect your answer in part (b)? d. Which three countries are most undervalued relative to the U.S. dollar in the most recent year? Which three are most overvalued? 5. Suppose that two countries, Vietnam and Côte d'Ivoire, produce coffee. The currency unit used in Vietnam is the dong (VND). Côte d'Ivoire is a member of Communauté Financière Africaine (CFA), a currency union of West African countries that use the CFA franc (XOF). In Vietnam, coffee sells for 4,500 dong (VND) per pound. The exchange rate is 30 VND per 1 CFA franc, EVND/XOF = 30. a. If the law of one price holds, what is the price of coffee in Côte d'Ivoire, measured in CFA francs? b. Assume the price of coffee in Côte d'Ivoire is actually 160 CFA francs per pound of coffee. Compute the relative price of coffee in Côte d'Ivoire versus Vietnam. Where will coffee traders buy coffee? Where will they sell coffee in this case? How will these transactions affect the price of coffee in Vietnam? In Côte d'Ivoire?
4. In recent years China has been routinely accused of currency manipulation. In this question you are asked to use the freely available finder.com Starbucks Index to investigate these claims. Go to http://www.finder.com/starbucks-index to access the most recent version of their data. a. What is the most recent price of a Starbucks tall latte in China? What is the implied yuan/dollar exchange rate based on these prices? b. Does this measure suggest that the Chinese yuan is overvalued or undervalued relative to the dollar? Why might this be beneficial to the Chinese economy? c. The fundamental assumption of this index is that the cost of producing a Starbucks tall latte is identical across countries. Why might this assumption be violated? How might this violation affect your answer in part (b)? d. Which three countries are most undervalued relative to the U.S. dollar in the most recent year? Which three are most overvalued? 5. Suppose that two countries, Vietnam and Côte d'Ivoire, produce coffee. The currency unit used in Vietnam is the dong (VND). Côte d'Ivoire is a member of Communauté Financière Africaine (CFA), a currency union of West African countries that use the CFA franc (XOF). In Vietnam, coffee sells for 4,500 dong (VND) per pound. The exchange rate is 30 VND per 1 CFA franc, EVND/XOF = 30. a. If the law of one price holds, what is the price of coffee in Côte d'Ivoire, measured in CFA francs? b. Assume the price of coffee in Côte d'Ivoire is actually 160 CFA francs per pound of coffee. Compute the relative price of coffee in Côte d'Ivoire versus Vietnam. Where will coffee traders buy coffee? Where will they sell coffee in this case? How will these transactions affect the price of coffee in Vietnam? In Côte d'Ivoire?
Chapter29: International Finance
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:4. In recent years China has been routinely accused of currency manipulation. In this question
you are asked to use the freely available finder.com Starbucks Index to investigate these
claims. Go to http://www.finder.com/starbucks-index to access the most recent version of
their data.
a. What is the most recent price of a Starbucks tall latte in China? What is the implied
yuan/dollar exchange rate based on these prices?
b. Does this measure suggest that the Chinese yuan is overvalued or undervalued relative to
the dollar? Why might this be beneficial to the Chinese economy?
c. The fundamental assumption of this index is that the cost of producing a Starbucks tall
latte is identical across countries. Why might this assumption be violated? How might
this violation affect your answer in part (b)?
d. Which three countries are most undervalued relative to the U.S. dollar in the most recent
year? Which three are most overvalued?
5. Suppose that two countries, Vietnam and Côte d'Ivoire, produce coffee. The currency
unit used in Vietnam is the dong (VND). Côte d'Ivoire is a member of Communauté
Financière Africaine (CFA), a currency union of West African countries that use the CFA
franc (XOF). In Vietnam, coffee sells for 4,500 dong (VND) per pound. The exchange
rate is 30 VND per 1 CFA franc, EVND/XOF = 30.
a. If the law of one price holds, what is the price of coffee in Côte d'Ivoire, measured in
CFA francs?
b. Assume the price of coffee in Côte d'Ivoire is actually 160 CFA francs per pound of
coffee. Compute the relative price of coffee in Côte d'Ivoire versus Vietnam. Where will
coffee traders buy coffee? Where will they sell coffee in this case? How will these
transactions affect the price of coffee in Vietnam? In Côte d'Ivoire?
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