Suppose that a Big Mac costs $5.00 in New York and SF30 in Geneva. Suppose further that the price of 1SF on that day is 20 (20 cents).

Suppose that a Big Mac costs $5.00 in New York and SF30 in Geneva. Suppose further that the price of 1SF on that day is 20₵ (20 cents). Calculate the purchasing power parity exchange rate between the Swiss franc and the dollar. Based on your calculation, is the SF overvalued or undervalued? Explain. Suppose now that a Big Mac costs £1.25 in London while the spot exchange rate is $2.50. Is the pound overvalued or undervalued? Explain. Is the Big Mac a good basis for PPP calculations? Why or Why not?

 
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