The Economist, a weekly international newsmagazine, regularly publishes data on the prices of the McDonald’s Big Mac hamburger sold in more than 100 countries. Since the McDonald’s Big Mac hamburger is almost identical across countries, the price of a Big Mac should be a good gauge for comparing the price levels across countries and measuring purchasing power parity (PPP) exchange rates. The PPP theory indicates that a higher Big Mac price in local currency should lead to a higher exchange rate (measured per US dollar)
1) Find the international prices of the Big Mac in both US dollars and local currency in 2015 and 2016 (as of March 31st) for the United States, Brazil, China, Germany, India, Japan, Russia, and Switzerland.
2) Calculate the predicted exchange rates based on Big Mac Prices (= implied PPP exchange rates) in 2015 and 2016 and compare them with the actual exchange rates between these countries and the United States
3) Investigate whether the currencies of Brazil, China, Germany(euro), India, Japan, Russia, and Switzerland were overvalued or undervalued against the US dollar in 2015 and 2016 on the basis of the PPP exchange rates implies by the Big Mac prices. If a currency is overvalued (undervalued) against the US dollar, we can alternatively say that the US dollar is undervalued (overvalued) against the currency.
4) If PPP theory is correct, Which currencies are expected to appreciate against the US dollar, and which currencies are expected to depreciate against the US dollar?
5) There is some conflict between domestic and external policy goals. A nation is sometimes tempted to keep its currency weak to boost exports (and consequently employment and income), but a weak currency can be viewed as a sign of the weakening economy. The United States has been confronting such a dilemma. the US dollar as a reserve currency should be stabilized, but a strong dollar hurts domestic stability. Discuss whether the United States should achieve domestic stability (weak dollar) or external stability (strong dollar)
3-5 pages double space