1.  The Big Mac Index Some people read tea leaves to predict the future, The Economist magazine prefers hamburgers. The magazine started the Big Mac Index in 1984 as a light-hearted guide to test whether currencies are at their "correct" exchange rate based on the Law of One Price. Under the Law of One Price, the price of the Big Mac should be the same if its local price is converted into dollars at the current exchange rates. Currently, the average price of a Big Mac is 3.50 in Britain and $5.20 in the U.S. The actual exchange rate is $3.30/. Please answer the following questions:

1. Where are hamburgers cheaper, in Britain or U.S.?
2. Calculate the PPP-implied exchange rate, based on the law of one price.
 
3. Based on the PPP, is the British pound overvalued or undervalued and by how much?

Answer rating: 100% (QA)

To determine where hamburgers are cheaper in Britain or the US we compare their prices in both count... View the full answer