The table below shows hypothetical prices of a tall Starbucks latte in countries
ID: 1189714 • Letter: T
Question
The table below shows hypothetical prices of a tall Starbucks latte in countries around the world. Using the data, and the fact that a latte costs $2 in the United States, calculate how much a country’s currency is under- or overvalued according to purchasing power.
Instructions: Round your answers to two decimal places.
Country
Price
Official exchange
rate
Implied exchange rate
if PPP holds
Cost of U.S. latte
Thailand
50 baht
32 baht/dollar
baht/dollar
%
Argentina
16 peso(s)
8 pesos/dollar
pesos/dollar
%
United Kingdom
1 pound(s)
0.7 pounds/dollar
pounds/dollar
%
Japan
440 yen
79 yen/dollar
yen/dollar
%
Country
Price
Official exchange
rate
Implied exchange rate
if PPP holds
Cost of U.S. latte
Thailand
50 baht
32 baht/dollar
baht/dollar
%
Argentina
16 peso(s)
8 pesos/dollar
pesos/dollar
%
United Kingdom
1 pound(s)
0.7 pounds/dollar
pounds/dollar
%
Japan
440 yen
79 yen/dollar
yen/dollar
%
Explanation / Answer
Thailand
Implied exchange rate = Latte price in Baht / Latte price in Dollar = 50 / 2 = 25 Baht / Dollar
Baht is undervalued.
% of undervaluation = (25 – 32)/24 = 29.1%
Argentina
Implied exchange rate = Latte price in Peso / Latte price in Dollar = 16/2 = 8 Peso / dollar
Peso is same.
as % of Overvaluation = (8-8)/8 = 0%
United Kingdom
Implied exchange rate = Latte price in Pound / Latte price in Dollar =1/2 = .5 Pound / Dollar
Pound is undervalued.
% of Undervaluation = (.5 - .7)/.7 = 28.57% ( -ve)
Japan
Implied exchange rate = Latte price in Yen / Latte price in Dollar = 440 / 2 = 220 Yen / Dollar
Yen is overvalued.
% of Overvaluation = (220 - 79)/79 = 178.48%
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