Explain briefly the main characteristics of the Big Mac price index and why it is considered a better predictor of changes in exchange rates than the implied PPP exchange rate. The BigMac currently costs 21.70 yuan in China and $5.71 in the US and the current exchange rate is S(yuan/$)=0.2. a) Would you say the yuan is correctly valued? b) What is the expected evolution of the exchange rate? c) What is the real exchange rate?
Explain briefly the main characteristics of the Big Mac price index and why it is considered a better predictor of changes in exchange rates than the implied PPP exchange rate. The BigMac currently costs 21.70 yuan in China and $5.71 in the US and the current exchange rate is S(yuan/$)=0.2. a) Would you say the yuan is correctly valued? b) What is the expected evolution of the exchange rate? c) What is the real exchange rate?
Chapter9: Forecasting Exchange Rates
Section: Chapter Questions
Problem 12QA
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Explain briefly the main characteristics of the Big Mac price index and why it is considered a better predictor of changes in exchange rates than the implied PPP exchange rate. The BigMac currently costs 21.70 yuan in China and $5.71 in the US and the current exchange rate is S(yuan/$)=0.2. a) Would you say the yuan is correctly valued? b) What is the expected evolution of the exchange rate? c) What is the real exchange rate?
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