Economist magazine’s Big Mac lndex forJuly 2012

(i) Using the Economist magazine’s Big Mac lndex forJuly 2012 (you will find the article: The economist latest Big Mac index on The

Economist online, July 26th 2012) what is the price ofa Big Mac in the US in US dollars and its price in Australia in Australian dollars.

What is the implied PPP value forthe Australian dollar?

(ii) Using Table F11 from the RBA website at:

what is the $A/$US exchange rate as at 31 July 2012 ? Compared to its PPP

value, is the Australian dollar overvalued or undervalued in terms ofthe US dollar?

(iii) According to the Big Mac Index, which 5

currencies were most (a) undervalued and (b) overvalued against the US dollar?

(iv) Use the data given in the Big Mac Index to see ifthe

New Zealand dollar is over or under-valued against the Australian dollar.

(v) What are the key assumptions underlying the above analysis