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

question 28

Essay

The "Big Mac Theory of Exchange Rates" tests the accuracy of the 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,explain how it would be profitable to buy Big Macs in Mexico instead of in the United States.

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Definitions:

Secondary Amine

An organic compound where two alkyl or aryl groups are attached to the same nitrogen atom, not including the hydrogen.

Nitrogen Atom

A chemical element with the symbol N and atomic number 7, it is a common element in the universe and essential for all known forms of life.

Amphetamines

A class of stimulant drugs used to enhance wakefulness and focus, especially in the treatment of ADHD and narcolepsy, but also used illicitly.