Question: Short Answer Section. For calculations show your work in the spaces provided. 1. (1 1 marks) Consider the following table, adapted from the Big Mac

Short Answer Section. For calculations show your work in the spaces provided. 1. (1 1 marks) Consider the following table, adapted from the Big Mac Index computed by The Economist magazine. The table shows prices of a Big Mac in local currencies and the current nominal exchange rate between the local currency and the Canadian dollar. Country Big Mac Price Implied PPP Today's Over(+) / Under(-) rate + Exchange Valuation against the in Local in C$ Rate C$, % + + Currency 1 C$ = Canada (C$) 3.73 1.0000 Argentina (Peso) 14 3.9525 Australia (A$) 4.35 1.0684 Brazil (Real) 8.71 1.7248 United States (US$) 4.17 1.0269 Chile (Peso) 1750 499.348 China (Yuan) 13.2 6.7356 a. Compute the Big Mac prices in Canadian dollars for each country. (3 marks) b . Compute the PPP exchange rate. (3 marks) C . Compute the overvaluation or undervaluation of each country's currency with respect to the Canadian dollar. A currency is considered to be overvalued if the nominal exchange rate is less than the PPP exchange rate. Overvaluation is the percentage difference between the nominal and the PPP exchange rate, computed using the following formula: [(PPP exchange rate - Nominal exchange rate) / Nominal exchange rate]*100. (3 marks) e. Which of the following goods do you think would be a better candidate for this exercise? Explain your choice. (2 marks) i . Cement ii. Diamonds iii. Fresh fruit iv . Computer RAM chips Answer: 11 10

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