Short Questions: Purchasing Power Parity (8 points)

The Big Mac Index! We discussed the concept of Purchasing Power Parity (PPP) in class. This used the prices of representative bundles of goods to convert GDP and GDP per capita values from local currencies to dollars. The Economist magazine began the practice of using the prices of Big Mac's to make the conversion. You are going to now!

Here is some evidence from the year 2007:

GDP Big Mac Price

US 14.5 $4.07

China 20 14.70CNY

Table 3: GDP and Big Mac Data from the US and China in 2007. US GDP reported in trillions of US dollars. China GDP reported in trillions of Chinese Yuan.

1. (2 points) Suppose China used all its GDP to buy Big Macs (in China). How many big macs could they purchase (report your answer in trillions of big macs)?

Answer:---------

2. (2 points) Using your answer from Part (a), compute the US dollar value of these big macs in the U.S.

Answer:--------

(Your answer should be $4.07 * your answer from Part (a).)

3. (2 points) Notice, what we have done is computed the following.

Big Mac Adjusted, US Dollar Value of Chinese GDP

= China GDP in Chinese Yuan * USD Price of Big Mac / CNY price of Big Mac

Using this formula, compute the 2016 Big Mac Adjusted U.S. Dollar Value of China's GDP

using the data in Table 4:

Answer: -------

4. (2 points) Compared to that in 2007, is China's Big Mac adjusted GDP in 2016 essentially the same as that of the U.S.?

Answer:---------