Question

Starbucks (Croatia). Starbucks opened its first store in Zagreb, Croatia, in October 2010. In Zagreb, the price of a tall vanilla latte is 25.70 Croatian kunas (kn or HRK). In New York City, the price of a tall vanilla latte is $2.65. The exchange rate between Croatian kunas and U.S. dollars is kn5.6288.
(a) According to purchasing power parity, is the Croatian kuna overvalued or undervalued?
(b) By what percent is the kuna overvalued or undervalued?

Answer 1

Answer:

a. Overvalued

b.  72.3% overvalued

Explanation:

a. Purchasing power parity when held, shows that prices of a specific good is the same across the world.

Price in New York  = $2.65

Price in Zagreb = kn25.70

$1 = 25.70/2.65

$1 = kn9.6981

According to PPP, Croatian Kuna is Overvalued as the exchange rate per the Vanilla Latte is higher than the official exchange rate.

b. =  $\frac{9.6981 - 5.6288}{5.6288.}$

= $\frac{4.0693}{5.6288}$

= 72.3% overvalued