Write a paper about 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 1986 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.

In July 2014, the average price of a Big Mac was £2.80 in Britain and $4.20 in the U.S. The actual exchange rate was $1.60/£. Please answer the following questions:

1) Where can you buy cheaper hamburgers: Britain or U.S.?

2) Calculate the “correct” exchange rate based on the law of one price.

3) Based on PPP, was the British pound overvalued or undervalued and by how much?