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

Question

6. Purchasing power parity Using data from The Economist's Big Mac Index for 2011, 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 Big Mac would have cost you $4.07 in the United States and GBP 2.39 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 follows Dollar prion of a Eig Mac in the Urnited Kinglom CBP239 x $3.90 CAP 1.00 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 french fries Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given. Note Round your answers to the nearest cent. Big Mac Index: July 25, 2011 Dollar Price Local Price (Foreign currency) 3.44 45.00 2.39 8.63 14.70 Actual Exchange Rate (Dollars per unit of foreign currency) 1.43 0.18 1.63 0.36 0.16 (Dollars) The Eurozone Norway United Kingdom Poland China 3.90 3.11 2.35 Source rency Cor par son Tb ·Th, b eno nist lat moanec ur 2. 2011. accessed Ap 1 26, 13, http://www.tanamated elegraalre-N2011/07/big-mas ider C

Explanation / Answer

Ans 1)

Ans 2)

To match the PPP echange rate USD has to appreciate with respect to UK Pounds

PPP exchange rate for Big Mac is $1,7/GBP

Exporting from less expensive company and imprting to more expepnsive company therefore in US price of Mac is $4.07 and Price of Mac is Eurozone is $4.91

Option 3 is correct

Local Price Actual Exchange Rate Dollar Price The Eurozone 3.44 1.43 4.9192 Norway 45 0.18 8.1 UK 2.39 1.63 3.8957 Polland 8.63 0.36 3.1068 China 14.7 0.16 2.352

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