<p>Your conclusion is correct here. Since at the current FX rate you can buy the burger cheaply at an equivalent rate of 2 EUR in the US. So basically, if you live in Germany and want to buy a Big Mac, you are better of buying the Big Mac from the US since via the FX rate you will still have 1 EUR left(if you started with 3 EUR) and hence this will increase the demand of the USD in the foreign exchange market and hence</p>

<p>USD should appreciate in the future => USD in undervalued => EUR is overvalued.</p>

CC BY-SA 3.0
2017-11-08T18:27:16.793Z
2017-11-08T18:27:16.793Z
Abhishek Joshi
<p>You are right. The EUR is overvalued. Or, to put it differently, a change in the exchange rate from 1/3 to 1/2 means that the EUR appreciated (or increased its value) with respect to the USD. Equivalently, the USD depreciated with respect to the EUR. You need more USD to buy a Big Mac in Germany.</p>

CC BY-SA 3.0
2017-10-09T08:21:06.183Z
2017-10-09T08:21:06.183Z
luchonacho
<p>An economics book has the following example:</p>

<p>In the USA, a Big Mac sells for 1 USD, while in Germany it sells for 3 EUR.</p>

<p>The "fair" FX relation would therefore be 1 USD = 3 EUR. At the FX market, however, the FX relation is 1 USD = 2 EUR.</p>

<p>The author now concludes that the EUR is undervalued. But I think that's wrong, the EUR is overvalued here, isn't it?</p>

CC BY-SA 3.0
2017-04-15T08:51:53.547Z
Why do you think the EUR is overvalued relative to the USD?
luchonacho
CC BY-SA 3.0
2017-04-15T09:23:27.733Z
@luchonacho Let's suppose I'm a tourist to the US who wants to have a Big Mac at the German airport before taking off. I then decide otherwise and have the Big Mac at the US airport. Swapping my 3 EUR I get back 1.5 USD and can practically now have 1.5 Big Macs - hence the EUR is overvalued against the USD.
Thorsten
<macroeconomics><purchasing-power-partity><foreign-exchange>
PPP / currency evaluation
Thorsten
# PPP / currency evaluation

(Asked by: username_0 on 2017-04-15)

An economics book has the following example:

In the USA, a Big Mac sells for 1 USD, while in Germany it sells for 3 EUR.

The "fair" FX relation would therefore be 1 USD = 3 EUR. At the FX market, however, the FX relation is 1 USD = 2 EUR.

The author now concludes that the EUR is undervalued. But I think that's wrong, the EUR is overvalued here, isn't it?

**Tags:** macroeconomics, purchasing-power-partity, foreign-exchange
> **Comments:**
> **username_1**: Why do you think the EUR is overvalued relative to the USD?  
> **username_0**: @luchonacho Let's suppose I'm a tourist to the US who wants to have a Big Mac at the German airport before taking off. I then decide otherwise and have the Big Mac at the US airport. Swapping my 3 EUR I get back 1.5 USD and can practically now have 1.5 Big Macs - hence the EUR is overvalued against the USD.  

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## 2 answers

### Answer by username_2 on 2017-11-08. Score: 1

Your conclusion is correct here. Since at the current FX rate you can buy the burger cheaply at an equivalent rate of 2 EUR in the US. So basically, if you live in Germany and want to buy a Big Mac, you are better of buying the Big Mac from the US since via the FX rate you will still have 1 EUR left(if you started with 3 EUR) and hence this will increase the demand of the USD in the foreign exchange market and hence

USD should appreciate in the future => USD in undervalued => EUR is overvalued.


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### Answer by username_1 on 2017-10-09. Score: 0

You are right. The EUR is overvalued. Or, to put it differently, a change in the exchange rate from 1/3 to 1/2 means that the EUR appreciated (or increased its value) with respect to the USD. Equivalently, the USD depreciated with respect to the EUR. You need more USD to buy a Big Mac in Germany.


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