QUESTION TWO (a) What is the Big Mac Index? Why can it be a misleading guide to purchasing power parity (PPP)? (5 Marks) (b) Consider a world that only comprises 2 goods (Good 1, Good 2) and 2 countries (UK and Japan). Assume that the population of all countries split their consumption equally between the two goods. The prices of goods at time t are listed below: UK (GBP) Japan (Yen) Good 1 160 Good 2 224 304 208 Let the spot exchange rate at time t be equal to 0.75 GBP per Yen. Does absolute purchasing power parity (APPP) hold between the UK and Japan? (5 Marks) (c) You are now given the following time t+1 information: UK national price: 240 Japan national price: 250 Using the information in (b), calculate the time 1+1 UK-Japan exchange rate implied by relative PPP