# purchasing power parity valuation watch

1. I need help with this question to check my answers. The question is if a burger costs 2 dollars in US and 2.50 euros in Europe and the current spot rate is 0.70 Euro/USD. Is the dollar over/under valued?

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3. Oh god, is this for accounting?
4. no Financial Management
5. Well I asked because in economics one might consider wages having an influence on the price.

But if you assume they should cost the same then 2.50 Euros in Dollars is 2.50/.7 = 3.57 Dollars. So the price is 2 in US but 3.57 in Europe. The Dollar is undervalued here. To get them the same price you would need an exchange rate of x where 2.5/x = 2 i.e. x = 2.5/2 = 1.25

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Updated: August 17, 2013
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