According to the Economist, which tracks the Big Mac index: The yuan is unquestionably undervalued. Our Big Mac index, based on the theory of purchasing-power parity, in which exchange rates should equalise the price of a basket of goods across countries, suggests that the yuan is 49% below its fair-value benchmark with the dollar.
a. What does the Economist mean by undervalued?
b. How is it possible to tell if the yuan is undervalued against the U.S. dollar by comparing the price of a Big Mac in the United States with the price of a Big Mac in China?
c. Did the Economist find the dollar price of a Big Mac in China at the current yuan-dollar exchange rate to be higher or lower than the price of a Big Mac in the United States?