8. Purchasing-power parity Using data from The Economist\'s Big Mac Index for 20

Question

8. Purchasing-power parity Using data from The Economist's Big Mac Index for 2016, the following table shows the local currency price of a Big Mac In several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a pig Mac would have cost you $4.93 in the United States and GBP 2.89 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as folfows: Dollar price of a Big Mac in the United Kingdom = GBP 2.89× GBP100 $4.71 For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries! Complete the final column of the table by computing the dollar price of a Ing Mac for the countries where this amount is not given. Note: Round your answers to the nearest cent.

Explanation / Answer

Dollar price of big Mac in Brazil = 13.50×($0.30/1)= $4.05.

Dollar price of big Mac in Switzerland= 6.50×($1.02/1)= $6.63.

The exchange rate that would have equalized the dollar price of Mac in United States and Brazil is $0.36. This change would mean that the currency of Brazil was undervalued by $0.06 against the dollar.

Exporting Big Macs from Brazil to the United States present an arbitrage opportunity because in Brazil Big Mac costs $4.05 that is $0.88 ($4.93-$4.05) less than that in United States.

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