Explain the failure of the big mac index

Reference no: EM131479763

Question: Table in the text shows the percentage undervaluation or overvaluation in the Big Mac, based on exchange rates in July 2012. Suppose purchasing power parity holds in the long run, so that these deviations would be expected to disappear. Suppose the local currency prices of the Big Mac remained unchanged. Exchange rates one year later on July 1, 2013, were as follows (Source: ft.com):

Based on these data and Table, calculate the change in the exchange rate from July 2012 to July 2013, and state whether the direction of change was consistent with the PPP-implied exchange rate using the Big Mac Index. How might you explain the failure of the Big Mac Index to correctly predict the change in the nominal exchange rate between July 2012 and July 2013?

Reference no: EM131479763

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