Question

ulate the Implied Purchasing Power Parity (PPP) exchange rate for each of the below! countries and explain which currencies are over-or undervalued. Actual Exchange Rate Country U.S. Japan China India Egypt Donut Price in U.S. Dollar 1.40 1.10 2.20 2.70 2.25 5.8 | 1.55 4.30 0.8

Answer 1

Implied purchasing parity=cost of good in country 1/cost of good in country 2.

Here we will compare all the countries with U.S.

Japan=1.10/1. 40

=0.79

China=2.20/1.40

=1.57

India =2.70/1.40

=1.93

Egypt=0.8/1.4

=0.57

Undervalued and overvalued currency :

Japan

According to ppp exchange rate of japan should be 0.79 and actual exchange rate is 2.25

So here the japan currency is undervalued.

China

According to ppp exchange rate should be 1.57 and actual rate is 5.8 so here the currency is undervalued

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India

According to ppp exchange rate should be 1.93 and here actual exchange rate is1. 55 so, it is overvalued.

Egypt

According to ppp exchange rate should be 0.57 and here actual exchange rate is 4.30. So here this country's currency is undervalued.