The Economist publishes annually the “hamburger standard” by which they compare the prices of the McDonalds Corporation Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and that therefore, the price should be the same.
Suppose that a Big Mac costs $5.50 in the United States and 10.86 liras in Turkey.
a) What is the implied PPP exchange rate of liras per dollar?
b) Suppose that the current exchange rate is 2.9215 liras per U.S. dollar. Is the Turkish lira overvalued or undervalued? By what percentage? Show all work.