A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more countries:
Country Price of a Big Predicted Exchange Actual Exchange Mac Rate Rate Indonesia 30 500rupiah rupiahstS ]3 344rupiah$US Hungary 900 forint frinsUs 283 forints$US Czech 70.0 koruna korunaSUs 34.7 koruna$US Republic Thailand 08 baht bałżUS 34.1 baht/$US China J7.0yuan yuanSUS 6.21 yuan$US
a. For each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Recall that the U.S. price of a Big Mac was $4.79.) How well does the theory of purchasing-power parity explain exchange rates?
b. According to purchasing-power parity, what is the predicted exchange rate between the Hungarian forint and the Chinese yuan? What is the actual exchange rate?
a)
| Country | Price of a Big Mac (X) | Predicted exchange Rate (X/4.20) | Actual exchange Rate |
| Indonesia | 30500 rupiah | 6367.43 rupiah/$US | 13344 rupiah/$US |
| Hungary | 900 forint | 187.89 forint/$US | 283 forint/$US |
| Czech republic | 70 koruna | 14.61 koruna/$US | 24.7 koruna/$US |
| Thailand | 108 baht | 22.55 baht/$US | 34.1 baht/$US |
| China | 17 yuan | 3.55 yuan/$US | 6.21 yuan/$US |
from the above calculation, we can see that predicted exchange rate and actual exchange rates are not exactly the same thus Purchasing-power parity is not a precise theory of exchange rates
b) according to purchase power parity, the exchange rate of
Hungarian forint to the Chinese yuan is (900/17) i.e 52.94 forints
per Chinese yuan.
Hence, the required actual exchange rate is (283/6.21) i.e 45.57
forints per Chinese yuan.
A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs.