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

question 43

Essay

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 Switzerland,the average price of a Big Mac at that time was 6.50 Swiss francs.If the exchange rate between the dollar and the Swiss franc was 0.93 Swiss francs per dollar,how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.

---

Definitions:

Common Ground

Shared interests, beliefs, or understanding that allows different parties to find mutual agreement or a basis for communication.

Humorous Anecdote

A short and amusing or interesting story about a real incident or person, often used to illustrate a point.

Negative Message

Communication that conveys bad news, rejection, or unfavorable information, requiring careful wording to minimize impact.

Goodwill

The intangible asset that arises when a business is valued at more than the sum of its tangible assets, often due to reputation, brand, or customer relationships.