You must read each slide, and complete any questions on the slide, in sequence.
Have you ever traveled to a foreign country or plan to in the near future? If so, you’ll need to buy foreign currency. The rate at which you buy foreign currency will impact how much the trip will cost you. Therefore, how much foreign currency you can buy with your U.S. dollars will be impacted by whether or not currencies are over or undervalued. Use The Economist’s Big Mac Index to explore this idea here.
To access the data:
The “Raw index” tab above the map provides the unadjusted index values while the “Adjusted index” tab provides the index adjusted for GDP per person.
Once a tab is selected, click the country of interest to view the most recent data.
The graph at the bottom of the page shows the data for that country for the available years.
The graph on the right displays overvaluation and undervaluation data for the most recent year for all available countries.
To view information from a certain time period, click on the country you’re interested in, then hover over or click the graph’s timeline for the period you’re interested in.
Click on that country again to deselect it in order to select another country.
Hint: If you can't find the country you're looking for on the map, try clicking or hovering over the bar graph bar for the country you're looking for to see it highlight on the map.
a. Suppose you want to visit either Mexico or Costa Rica on Spring Break. Using the data from July 2016, fill in the following table.
Price of Big Mac (in local currency)
Implicit Exchange Rate
Actual Exchange Rate
Over or undervalued?
% over or undervalued
Costa Rica
colones
Mexico
pesos
United States
U.S. dollars
--
--
--
--
Correct!
To determine the table values, either hover the cursor over the country in the map or over the country’s name in the chart on the right. You can locate the most recent value directly below the map.
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b. Based on your answers in the table, which currency was undervalued more? How might this impact which country you decide to go to for Spring Break if you have $500 worth of spending money?
The was undervalued more, which implies, ceteris paribus, that your $500 would buy more in than in . If you want to get the most for your money, you should go to .
Correct!
The peso was undervalued by 52.9% compared to the colón's 18.3%. What does this mean in terms of how far your $500 will go?
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Question 2
Now let's explore the Big Mac index over time using the same countries, Mexico and Costa Rica.
Using the "Raw index," what has been the general relationship over time of the Mexican peso relative to the U.S. dollar?
a. The relationship exhibits a trend.
Correct!
Does the collection of data points move in a specific way over time? Describe the pattern.
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Using the "Raw index," what has been the general relationship over time of the Costa Rican colón relative to the U.S. dollar?
b. The relationship exhibits a(n) trend initially, but then switches to a general , with the exception of .
Correct!
Does the collection of data points move in a specific way over time? Describe the pattern.
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c. Is purchasing power parity as represented by the Big Mac index more accurate over the short term or the long term? Why?