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

question 45

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 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:

Community Value

The shared beliefs, norms, and standards of a group that guide and influence the behavior and interactions within the community.

Hand-delivered

The method of physically transporting a document or package directly to the recipient by a person, rather than using a postal or courier service.

Employment Opportunities

Prospects and openings for jobs and careers available to individuals in the job market within various industries.

Summer Job

Temporary employment taken during the summer months, often by students, to gain experience or save money.