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

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The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2015,the Economist reported that the average price of a Big Mac in the United States was $4.79.In Mexico,the average price of a Big Mac at that time was 49 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:

Uvula

The uvula is a small, fleshy extension at the back of the soft palate above the throat, playing roles in speech and the triggering of the gag reflex.

Nasopharynx

The upper part of the throat behind the nose, serving as an airway in the respiratory system and a pathway for food and liquids.

Nasal Conchae

Curved bony structures in the nasal cavity that help to moisten, warm, and filter the air we breathe.

Soft Palate

The mobile, fleshy part at the back of the roof of the mouth that separates the oral cavity from the nasopharynx during swallowing and speech.

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