Calculate the ppp-implied exchange rate based on the law, Financial Accounting

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Calculate the ppp-implied exchange rate based on the law

Problem

Currently, the average price of a Big Mac is RMB 22.50 in China and $5.20 in the U.S. The actual exchange rate is RMB 6.50/$. Answer the following questions:

i. Where are hamburgers cheaper, in China or U.S.?
ii. Calculate the PPP-implied exchange rate, based on the law of one price.
iii. Based on the PPP, is the Chinese yuan overvalued or undervalued, and by how much?

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Financial Accounting: Calculate the ppp-implied exchange rate based on the law

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