CAS EC 102 Lecture Notes - Lecture 17: Big Mac Index, Renminbi, Substitute Good

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CAS EC 102 Full Course Notes
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CAS EC 102 Full Course Notes
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Nominal exchange rate price of one currency in terms of another currency. Number of units of foreign currency per unit of domestic currency. Real exchange rate - the price of goods in one country in terms of the price of goods in some other country. Number of units of foreign goods per unit of domestic good. E should be such that e = 1. So if e = 1, it must be that e =(cid:3007)(cid:2871)(cid:2868)(cid:2868) If e is at the ppp level, e = 1. If e > 1, then e is too high, i. e. , the foreign currency is undervalued relative to the domestic currency. Instead, e = 6. 32 yuan to the dollar. It takes more renminbi to buy a dollar than it would under ppp. So the yuan is undervalued according to ppp. If e < 1, then e is too low, i. e. , the foreign currency is overvalued relative to the domestic currency.

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