Question

Starbucks opened its first store in Seoul, Korea in October 2002. The price of a tall vanilla latte is 3,000 Korean Won. In New York City, the price of a tall vanilla latte is $3.00. The exchange rate between Korean Won and U.S. dollars is Won 1,150/$. According to purchasing power parity, is the Korean Won overvalued or undervalued

Answer 1

The Korean Won is undervalued

Step-by-step explanation:

The Korean Won is undervalued if we determine this measure by comparing the prices of the vanilla latte at a Korean Starbucks and at an American Starbucks.

If purchasing power parity was perfectly equal, the latte at the Seoul Starbucks would be priced at $3,450, because the exchange rate is 1,150/$ and $3 x 1,1150 = 3,450, $3 being the price of the latte in New York City.

We can see that the latte in Seoul only costs 3,000 Won, so, under this comparison, the Won is undervalued by 450 Won.