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The Big Mac Index and the Undervalued Yuan

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1. The big Mac index computed by the Economics has consistently found the U.S dollar to be undervalued against some currencies and overhauled against others. This findings seems to call for a rejection of the purchasing power parity theory. Explain why this index may not be a valued test of the theory.

2. Why would China want its own currency to be undervalued relative to the U.S? How does China maintain an undervalued currency?

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This solution explains the Big Mac Index, and the undervalued Chinese Yuan. The sources used are also included in the solution.

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The Big Mac index may not be a valued test of the theory. There are several reasons for it. First Big Mac index is an informal way of measuring the purchasing power parity; it is not a formal method. The Big Mac index is not applicable everywhere it can be shared only between those countries that are facing a similar stage of development (a) For example, the social status alters the demand for Big Mac. In some countries the Big Mac restaurants are relatively expensive. Further the demand ...

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