Table 30-1 Source: "The Big Mac Index," Economist, July 28, 2011

Question

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The Answer is To calculate the implied exchange rate,divide the foreign currency price of a Big Mac by the U.S.price.

To calculate the implied exchange rate,divide the foreign currency price of a Big Mac by the U.S.price. The U.S.dollar is overvalued if the actual exchange rate is greater than the implied exchange rate,and undervalued if the actual exchange rate is less than the implied exchange rate.In this case,the U.S.dollar is overvalued against the Peruvian new sol and the Turkish lira,and it is undervalued against the Danish krone and Swedish krona.Overvaluation of the U.S.dollar would lead us to predict that the value of the dollar would fall in the future relative to the new sol and the lira.Undervaluation of the U.S.dollar would lead us to predict that the dollar's value would rise in the future relative to the krone and the krona.

The U.S.dollar is overvalued if the actual exchange rate is greater than the implied exchange rate,and undervalued if the actual exchange rate is less than the implied exchange rate.In this case,the U.S.dollar is overvalued against the Peruvian new sol and the Turkish lira,and it is undervalued against the Danish krone and Swedish krona.Overvaluation of the U.S.dollar would lead us to predict that the value of the dollar would fall in the future relative to the new sol and the lira.Undervaluation of the U.S.dollar would lead us to predict that the dollar's value would rise in the future relative to the krone and the krona.

Table 30-1 Source: "The Big Mac Index," Economist, July 28, 2011

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