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

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Essay

The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory.In July 2013,the Economist reported that the average price of a Big Mac in the United States was $4.56.In Mexico,the average price of a Big Mac at that time was 37 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.


Definitions:

Internal State

The condition or situation within an organism or object, often referring to physiological or emotional states not visible externally.

Extinction

The elimination or suppression of a response caused by the discontinuation of reinforcement or the removal of the unconditioned stimulus.

S-R Association

Stands for Stimulus-Response Association, which refers to the connection formed between a specific stimulus and a consequent response in behaviorism.

Guthrie

Edwin Ray Guthrie was a behavioral psychologist known for his theory that learning is a direct association between stimulus and response, occurring in a single trial without reinforcement.

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