The Economist magazine states that "[t]he world economy looks very different once countries' output is adjusted for differences in prices." The Economist, May 27th, 2004.
Explain why PPP measures of income levels are appropriate in determining differences between rich and poor countries.
Determine, using the Big Mac PPP, if Costa Rica's currency is overvalued or undervalued against the dollar, given the following information. Show all your calculations and explain.
Big Mac price in Costa Rica's currency: 2290 colones
Big Mac's price in U.S. dollars: 5.58 dollars
Market exchange rate: 606.975 colones/$