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

question 34

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 Canada was $4.07.In Switzerland, the average price of a Big Mac was 6.50 Swiss francs.If the exchange rate between the Canadian dollar and the Swiss franc was 0.93 Swiss francs per Canadian dollar, how would purchasing power parity predict the exchange rate would change in the long run? Support your answer graphically.

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Definitions:

Walter Mondale

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