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

question 9

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, explain how it would be profitable to buy Big Macs in Canada instead of in Switzerland.

---

Definitions:

Reporting Requirements

These refer to the specific guidelines or regulations that entities must follow when preparing and presenting their financial and operational information to regulatory bodies or the public.

Financial Statement Disclosures

Refers to the requirement for organizations to provide additional context, data, and explanations within their financial statements, helping stakeholders understand the financial health and decisions of the entity.

Equity Method

An accounting technique used by firms to account for their investments in other companies when they hold significant influence but not full control.

Swaps

Financial derivatives where two parties exchange financial instruments or cash flows for a set period according to specified terms.