The Economist magazine uses prices of McDonald’s Big Mac
The Economist magazine uses prices of McDonald’s Big Mac hamburger to calculate the PP values for currencies. The following data are taken the January 2015 Big Max Index.
Bug Mac Price in Local Currency
US USD$4.79
Australia AUD$5.30
New Zealand NZD$5.90
(i) Calculate the implied PPP values for the Australian dollar against the US dollar and for the Australian dollar against the New Zealand dollar.
(ii) Using the daily exchange rate data from the RBA website at http://www.rba.gov.au/statistics/historical-data.html#exchnage-rates what are the values of the $A/$US and $A/$NZ exchange rates for the 31 January 2015?
(iii) Compared to its PPP value, is the Australian dollar overvalued or undervalued in terms of the US dollar? Explain
(iv) Compared to its PPP value, is the Australian dollar overvalued or undervalued in terms of the NZ dollar? Explain
(v) Taking the Australian price as given and ignoring transportation costs, according to the law of one price what should have been the price of a Big Mac in New Zealand on 31 January 2015? Explain whether or not you would expect the law of one price to hold.
