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The "Big Mac Theory of Exchange Rates" Tests the Accuracy

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The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2011,the Economist reported that the average price of a Big Mac in the United States was $4.07.In Mexico,the average price of a Big Mac at that time was 32 pesos.If the exchange rate between the dollar and the peso was 13.60 pesos per dollar,how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.


Definitions:

Probability

An estimation of the chances that an event will transpire, articulated as a number from 0 to 1.

Statistician

A professional who applies statistical theories and methods to collect, review, analyze, and draw conclusions from data.

Sample Information

The data and characteristics collected from a subset of a population, used to make inferences or predictions about the overall population.

Inferences

The process of drawing logical conclusions from available evidence or known facts.

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