The Beer Standard. In 1999, The Economist reported the creation of an index, or standard, for the evaluation of African currency values using the local prices of beer. Beer, instead of Big Macs, was chosen as the product for comparison because McDonald’s had not penetrated the African continent beyond South Africa, and beer met most of the same product and market characteristics required for the construction of a proper currency index. Investec, a South African investment banking firm, has replicated the process of creating a measure of purchasing power parity (PPP) like that of the Big Mac Index of The Economist, for Africa. The index compares the cost of a 375-milliliter bottle of clear lager beer across Sub-Saharan Africa. As a measure of PPP, the beer needs to be relatively homogeneous in quality across countries, and must possess substantial elements of local manufacturing, inputs, distribution, and service in order to actually provide a measure of relative purchasing power. The beer is first priced in local currency (purchased in the taverns of the locals, and not in the high-priced tourist centers). The price is then converted to South African rand and the rand-price compared to the local currency price as one measure of whether the local currency is undervalued or overvalued versus the South African rand. Use the data in the table and complete the calculation of whether the individual currencies are undervalued or overvalued.
The Beer Standard. In 1999, The Economist reported the creation of an index, or standard, for the evaluation of African currency values using the local prices of beer. Beer, instead of Big Macs, was chosen as the product for comparison because McDonald’s had not penetrated the African continent beyond South Africa, and beer met most of the same product and market characteristics required for the construction of a proper currency index. Investec, a South African investment banking firm, has replicated the process of creating a measure of
The index compares the cost of a 375-milliliter bottle of clear lager beer across Sub-Saharan Africa. As a measure of PPP, the beer needs to be relatively homogeneous in quality across countries, and must possess substantial elements of local manufacturing, inputs, distribution, and service in order to actually provide a measure of relative purchasing power. The beer is first priced in local currency (purchased in the taverns of the locals, and not in the high-priced tourist centers). The
Problem 6.21
|
Beer Prices
|
||||||
|---|---|---|---|---|---|---|
|
Country |
Beer |
Local Currency |
Price in Currency |
Price in Rand |
Implied PPP Rate |
Spot Rate |
|
South Africa |
Castle |
Rand |
2.30 |
- |
- |
- |
|
Botswana |
Castle |
Pula |
2.20 |
2.94 |
0.96 |
0.75 |
|
Ghana |
Star |
Cedi |
1,200.00 |
3.17 |
521.74 |
379.10 |
|
Kenya |
Tusker |
Shilling |
41.25 |
4.02 |
17.93 |
10.27 |
|
Malawi |
Carlsberg |
Kwacha |
18.50 |
2.66 |
8.04 |
6.96 |
|
Mauritius |
Phoenix |
Rupee |
15.00 |
3.72 |
6.52 |
4.03 |
|
Namibia |
Windhoek |
N$ |
2.50 |
2.50 |
1.09 |
1.00 |
|
Zambia |
Castle |
Kwacha |
1,200.00 |
3.52 |
521.74 |
340.68 |
|
Zimbabwe |
Castle |
Z$ |
9.00 |
1.46 |
3.91 |
6.15 |
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
