GLOBE

Problem Set 30-1


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1. Use the Economist magazine article on the Big Mac index (4/27/00 issue) to answer the following questions.
a. Explain the PPP theory in more detail. How is an equilibrium achieved? Why is this a long-run theory?

b. Find where the US $ is most overvalued and most undervalued. Also in which foreign country is the $ purchasing power closest to that in the US?

c. Suppose you must choose between 3 job offers in different countries. The US job pays $30,000, the Danish job pays DKr290,000, while the Indonesian job pays Rupiah150,000,000. First, which job provides the highest US$ salary at April 25th, 2000 exchange rates? Second, which job provides the salary with the highest local purchasing power of Big Macs? Show your calculations for these.


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