2016/11/2 Big Mac Index 2014-Undervaluation Big Mac Index 2014-Undervaluation sPrice at Img Market Over/Under Price at Local 5 Pric Implied Market over/Under States SFr 6.5 HKS 16 2.12393 Rea10.25 244367 Africa Rand 19.9 2.45 1.14 4.644.774.31 NTS 75 4.63214419.45 经 CBN Cost of Living Index CBN Cost of Living Index Eg China Business News released the ppp exchange rate and undervaluation of RMb on july 21st 2010. …2# commodity for more than 50 economies, CBN focuses on RMB 1m“ by comparing the prices of 30 daily-living items in Shanghai with those in New York, London, Paris and Tokyo. The 30 chosen items reflect the cost of modern living in the cities, covering 6 categories including clothing, food lodging transportation, service and other. ot surprising--RMB is undervalued by 28%, 43%, 35% and 42% respectively CBN Cost of Living Index From appp to RPPp Relative purchasing power parity ange in the differential rate of inflation between two 日2三 ountries tends to be offset over the long run by an eq t opposite change in the exchange rate between the two :灬 oes RPpP hold? ": In the short run no. trade flows are much slower to ue aman sponse to return differentials. The slow response in the product market provides MNEs time and space to arbitrage on raw materials and products all over the world and make a profit.2016/11/2 6 Big Mac Index 2014- Undervaluation Price at Local Currency $ Price at Market Rate Implied PPP Market Rate Over/Under￾Valuation(%) United States $4.20 4.20 - - - Norway Kroner 41 6.79 9.77 6.04 62 Switzerland SFr 6.5 6.81 1.55 0.96 62 Sweden SKr 41 5.91 9.77 6.93 41 Brazil Real 10.25 5.68 2.44 1.81 35 Denmark DK 31.5 5.37 7.50 5.86 28 Australia A$4.80 4.94 1.14 0.97 18 Argentina Peso 20.0 4.64 4.77 4.31 10 Canada C$4.73 4.63 1.13 1.02 10 Uruguay Peso90 4.63 21.44 19.45 10 4-31 Big Mac Index 2014- Undervaluation Price at Local Currency $ Price at Market Rate Implied PPP Market Rate Over/Under￾Valuation(%) United States $4.20 4.2 - - - India Rupee 84.0 1.62 20.01 51.9 -61 Ukraine Hryvnia 17 2.11 4.05 8.04 -50 Hong Kong HK$ 16.5 2.12 3.93 7.77 -49 Malaysia Ringgit 7.35 2.34 1.75 3.14 -44 China Yuan 15.4 2.44 3.67 6.32 -42 South Africa Rand 19.95 2.45 4.75 8.13 -42 Indonesia Rupiah 22,534 2.46 5369 9160 -41 Thailand Baht 78 2.46 18.58 31.8 -41 Taiwan NT$ 75.0 2.5 17.87 30 -40 Egypt Pound 15.5 2.57 3.69 6.04 -39 4-32 CBN Cost of Living Index • China Business News released the PPP exchange rate and undervaluation of RMB on July 21st 2010. • Rather than providing the comparison based on one commodity for more than 50 economies, CBN focuses on RMB by comparing the prices of 30 daily-living items in Shanghai with those in New York, London, Paris and Tokyo. • The 30 chosen items reflect the cost of modern living in the cities, covering 6 categories including clothing, food, lodging, transportation, service and other. • The results are not surprising——RMB is undervalued by 28%, 43%, 35% and 42% respectively. 4-33 CBN Cost of Living Index 4-34 CBN Cost of Living Index 4-35 4-36 From APPP to RPPP • Relative purchasing power parity – any change in the differential rate of inflation between two countries tends to be offset over the long run by an equal but opposite change in the exchange rate between the two countries. • Does RPPP hold? – In the short run, no. Trade flows are much slower to respond to price differentials than capital markets response to return differentials. – The slow response in the product market provides MNEs time and space to arbitrage on raw materials and products all over the world and make a profit