Case Study

Case Study 19.1: The Big Mac Index

Q. 1 The Big Mac Price Index computed by the Economist has consistently found the U.S. dollar to be undervalued against some other major currencies, which seems to call for a rejection of the purchasing power parity theory.  Explain why the index may not be a valid test of the theory.

Q.2 Why would china want its own currency to be undervalued relative to the US dollar? How can china maintain an undervalued currency?

Solution required in 150 words of both question.