5. Purchasing power parity Aa In January 2010, the price of a Big Mac in Canada

Question

5. Purchasing power parity Aa In January 2010, the price of a Big Mac in Canada was $3.63. Using data from The Economist's Big Mac Index for January 2010, the following table shows the local currency price of a Big Mac in several countries and the actual exchange rate. At the time, a Big Mac in the United Kingdom would have cost you 1.99 British pounds. The actual exchange rate between the pound and the dollar was $2.31 per British pound. The dollar price of a Big Mac in the United Kingdom was, therefore, 1.99 British pounds x $2.31 per British pound $4.60, which is more than you'd have paid in Canada. For the price you paid for a Big Mac in the United Kingdom, you could have purchased a Big Mac in Canada and had some change left over for french fries Country Argentina Brazil United Kingdom Euro zone Poland Switzerland Source: "Big Mac Index," The Economist, accessed Sept. 27, 2013, www.economist.com/content/big-mac-index Big Mac Index: January 2010 Local Price 8.25 pesos 6.4 reais 1.99 pounds 2.94 euros 6.9 zloty 6.3 francS Actual Exchange Rate $0.38 per peso $0.56 per real $2.31 per pound $1.53 per euro $0.39 per zloty $0.95 per franc Purchasing power parity (PPP) theory states that exchange rates should equalize the prices of goods in any two countries. For the dollar price of a Big Mac to be the same in both countries, a Canadian citizen would need to be able to convert $3.63 into exactly 1.99 British pounds. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in Canada by the price in the United Kingdom $3.63 PPP Exchange Rate (Canadian dollars per British pound) = 1.99 British pounds $1.82 per British pound = In January 2010, the dollar price of a Big Mac in Argentina was the dollar price of a Big Mac in Canada What exchange rate would have equalized the dollar price of a Big Mac in Canada and Argentina? That is, what is the PPP exchange rate for Big Macs? O $3.13 per peso O $0.38 per peso O $3.63 per peso O $0.44 per peso If exchange rates had been adjusted to bring about Big Mac PPP between the dollar and the peso, the value of the peso would have against the dollar, and the value of the dollar would have against the peso

Explanation / Answer

dollar price of big mac in Argentina= 8.25peso×$.38/peso

=$8.25×.38=$3.135

exchange rate that will equalize $price in Canada and Argentina= $3.63÷8.25peso= $0.44per peso

Peso would have been appreciated because now 1 peso =$.44

earlier it was $0.38.It means peso has become costly.

value of dollar would have depreciated against peso because now dollar is cheap.

thanx

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