Economics of Money, Banking and Financial Markets, The, Business School Edition (5th Edition) (What's New in Economics)
5th Edition
ISBN: 9780134734200
Author: Frederic S. Mishkin
Publisher: PEARSON
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Question
Chapter 20, Problem 2WE
To determine
The Local prices, exchange rate and PPP across the countries.
Concept Introduction:
Expert Solution & Answer
Explanation of Solution
Apart from the International Comparisons Program (ICP) established in 1968, the annual test of PPP tracks the annual price of Mc Donald’s Corporation (MCD) Big Mac burger in many countries since 1986. In this PPP the price of the Big Mac is the benchmark and the hamburger replaces the basket.
The PPP would be the ratio of local prices in a country to the dollar price of the basket. This is also the expected rate of exchange. Is the actual rate of exchange is higher than this, the dollar is said to be overvalued and if the rate of exchange is lower dollar is said to be undervalued.
Part (a)
The graph below establishes a relationship between the local price, the expected rate of exchange or the PPP and the actual rate of exchange between the dollar and the local currency on the data sourced from the Big Mac PPP index.
| Country | Local Price | Actual Dollar Exchange Rate | Expected Exchange Rate or the PPP |
| Argentina | 75 | 18.9 | 14.2 |
| Australia | 5.9 | 1.3 | 1.1 |
| Brazil | 16.5 | 3.2 | 3.1 |
| Britain | 3.19 | 0.7 | 0.6 |
| Canada | 6.55 | 1.2 | 1.2 |
| Chile | 2600 | 605.9 | 492.4 |
| China | 20.4 | 6.4 | 3.9 |
| Colombia | 10900 | 2844.1 | 2064.4 |
| Costa Rica | 2290 | 568.5 | 433.7 |
| Czech Republic | 79 | 20.7 | 15.0 |
| Denmark | 30 | 6.1 | 5.7 |
| Egypt | 34.21 | 17.7 | 6.5 |
| Euro area | 3.95 | 0.8 | 0.7 |
| Hong Kong | 20.5 | 7.8 | 3.9 |
| Hungary | 864 | 252.1 | 163.6 |
| India | 180 | 63.9 | 34.1 |
| Indonesia | 35750 | 13359.0 | 6770.8 |
| Israel | 16.5 | 3.4 | 3.1 |
| Japan | 380 | 110.7 | 72.0 |
| Latvia | 2.7 | 0.8 | 0.5 |
| Lithuania | 2.8 | 0.8 | 0.5 |
| Malaysia | 9 | 4.0 | 1.7 |
| Mexico | 48 | 18.7 | 9.1 |
| New Zealand | 6.2 | 1.4 | 1.2 |
| Norway | 49 | 7.9 | 9.3 |
| Pakistan | 375 | 110.5 | 71.0 |
| Peru | 10.5 | 3.2 | 2.0 |
| Philippines | 134 | 50.7 | 25.4 |
| Poland | 10.1 | 3.4 | 1.9 |
| Russia | 130 | 56.7 | 24.6 |
| Saudi Arabia | 12 | 3.8 | 2.3 |
| Singapore | 5.8 | 1.3 | 1.1 |
| South Africa | 30 | 12.3 | 5.7 |
| South Korea | 4400 | 1069.3 | 833.3 |
| Sri Lanka | 580 | 153.8 | 109.8 |
| Sweden | 49.1 | 8.0 | 9.3 |
| Switzerland | 6.5 | 1.0 | 1.2 |
| Taiwan | 69 | 29.6 | 13.1 |
| Thailand | 119 | 32.0 | 22.5 |
| Turkey | 10.75 | 3.8 | 2.0 |
| UAE | 14 | 3.7 | 2.7 |
| Ukraine | 47 | 28.7 | 8.9 |
| United States | 5.28 | 1.0 | 1.0 |
| Uruguay | 140 | 28.6 | 26.5 |
| Vietnam | 65000 | 22711.5 | 12310.6 |
| Austria | 3.4 | 0.8 | 0.6 |
| Belgium | 4.1 | 0.8 | 0.8 |
| Estonia | 3.15 | 0.8 | 0.6 |
| Finland | 4.56 | 0.8 | 0.9 |
| France | 4.2 | 0.8 | 0.8 |
| Germany | 3.9 | 0.8 | 0.7 |
| Greece | 3.35 | 0.8 | 0.6 |
| Ireland | 4.07 | 0.8 | 0.8 |
| Italy | 4.2 | 0.8 | 0.8 |
| Netherlands | 3.71 | 0.8 | 0.7 |
| Portugal | 3.2 | 0.8 | 0.6 |
| Spain | 3.95 | 0.8 | 0.7 |
| Country Local Price Actual Dollar Exchange Rate Expected Exchange Rate or the PPP Argentina 75 18.9 14.2 Australia 5.9 1.3 1.1 Brazil 16.5 3.2 3.1 Britain 3.19 0.7 0.6 Canada 6.55 1.2 1.2 Chile 2600 605.9 492.4 China 20.4 6.4 3.9 Colombia 10900 2844.1 2064.4 Costa Rica 2290 568.5 433.7 Czech Republic 79 20.7 15.0 Denmark 30 6.1 5.7 Egypt 34.21 17.7 6.5 Euro area 3.95 0.8 0.7 Hong Kong 20.5 7.8 3.9 Hungary 864 252.1 163.6 India 180 63.9 34.1 Indonesia 35750 13359.0 6770.8 Israel 16.5 3.4 3.1 Japan 380 110.7 72.0 Latvia 2.7 0.8 0.5 Lithuania 2.8 0.8 0.5 Malaysia 9 4.0 1.7 Mexico 48 18.7 9.1 New Zealand 6.2 1.4 1.2 Norway 49 7.9 9.3 Pakistan 375 110.5 71.0 Peru 10.5 3.2 2.0 Philippines 134 50.7 25.4 Poland 10.1 3.4 1.9 Russia 130 56.7 24.6 Saudi Arabia 12 3.8 2.3 Singapore 5.8 1.3 1.1 South Africa 30 12.3 5.7 South Korea 4400 1069.3 833.3 Sri Lanka 580 153.8 109.8 Sweden 49.1 8.0 9.3 Switzerland 6.5 1.0 1.2 Taiwan 69 29.6 13.1 Thailand 119 32.0 22.5 Turkey 10.75 3.8 2.0 UAE 14 3.7 2.7 Ukraine 47 28.7 8.9 United States 5.28 1.0 1.0 Uruguay 140 28.6 26.5 Vietnam 65000 22711.5 12310.6 Austria 3.4 0.8 0.6 Belgium 4.1 0.8 0.8 Estonia 3.15 0.8 0.6 Finland 4.56 0.8 0.9 France 4.2 0.8 0.8 Germany 3.9 0.8 0.7 Greece 3.35 0.8 0.6 Ireland 4.07 0.8 0.8 Italy 4.2 0.8 0.8 Netherlands 3.71 0.8 0.7 Portugal 3.2 0.8 0.6 Spain 3.95 0.8 0.7 |
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Chapter 20 Solutions
Economics of Money, Banking and Financial Markets, The, Business School Edition (5th Edition) (What's New in Economics)
Ch. 20 - Prob. 1LOCh. 20 - Prob. 2LOCh. 20 - Prob. 3LOCh. 20 - Prob. 4LOCh. 20 - Prob. 1QCh. 20 - Prob. 2QCh. 20 - Prob. 3QCh. 20 - Prob. 4QCh. 20 - Prob. 5QCh. 20 - Prob. 6Q
Ch. 20 - Prob. 7QCh. 20 - Prob. 8QCh. 20 - Prob. 9QCh. 20 - Prob. 10QCh. 20 - Prob. 11QCh. 20 - Prob. 12QCh. 20 - Prob. 13QCh. 20 - Prob. 14QCh. 20 - Prob. 15QCh. 20 - Prob. 16QCh. 20 - Prob. 17APCh. 20 - Prob. 18APCh. 20 - Prob. 19APCh. 20 - Prob. 20APCh. 20 - Prob. 21APCh. 20 - Prob. 22APCh. 20 - Prob. 23APCh. 20 - Prob. 24APCh. 20 - Prob. 25APCh. 20 - Prob. 1DAPCh. 20 - Prob. 2DAPCh. 20 - Prob. 1WECh. 20 - Prob. 2WE
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