Robert Cumby in the Macroeconomics book said:
China's currency, Yuan, should appreciate to 2.80 instead of 6.88(now) because
the price of Big Mac in China is $1.45(￥10) and the price in US is $3.57
According to the Purchasing Power Parity(PPP) theory saying that the exchange rate between two countries should reflect the price level difference.
Thus, the Yuan is 1-$1.45/$3.57=59.4% below its Big Mac parity.
And the exchange rate of Yuan/Dollar should be ￥10/$3.57 = 2.80.
And they claimed they have studied this in 14 countries over 10 years, and the difference between the current exchange rate and the Big Mac exchange rate disappeared in 1 year.
See Big Mac Index on wiki for more info.
1 comment:
Big Mac in china is not like Big Mac in U.S. They should use some equivolant local food, e.g. JIAN BING, BAOZI, etc. I believe they will get very different results.
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