Using a real-world application developed by The Economist to analyze, calculate, and interpret currency valuation in various

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Question:

Using a real-world application developed by The Economist to analyze, calculate, and interpret currency valuation in various countries through Purchasing Power Parity (PPP) by using the Big Mac Index.

Background:

The Big Mac Index is a tool used to measure the purchasing power parity between nations, using the price of McDonald's Big Mac as the benchmark. It provides an intuitive measure for comparing national economies and currency valuation.

Tasks:

1. Data Collection:

Obtain the latest data on Big Mac prices from a range of countries (at least three, they could be Canada, US, or any country for which data is available), including the local currency and the current exchange rate against the US dollar. Sources for this data can include The Economist's reports or their website.

2. Data Analysis: -

Task 1:Convert the local Big Mac prices into US dollars.

- Formula: Price in Local Currency / Exchange Rate = Price in USD

Task 2: Compare the converted prices to the US Big Mac price to determine if the local currency is overvalued or undervalued relative to the USD.

Task 3: Calculate the implied PPP of each currency.

- Formula: Local Big Mac Price / US Big Mac Price = Implied PPP

Task 4:Determine the percentage overvaluation or undervaluation of each currency compared to the USD.

- Formula: ((Implied PPP - Actual Exchange Rate) / Actual Exchange Rate) x 100%

3. Interpretation: - Analyze your results to identify patterns and outliers. Discuss which currencies are the most overvalued or undervalued and hypothesize potential economic impacts on those countries.

4. Historical Comparison:- Compare the findings with historical data over the past five years to identify any trends or significant changes in currency valuation.

5. Data Visualization: - Present the findings in a clear and concise manner using charts or graphs.

6. Critical Analysis: - Discuss the limitations of the Big Mac Index as a measure of PPP. Consider factors like production costs, taxation, and how using a basket of goods might provide a more comprehensive analysis.