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