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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:

Person-Situation Controversy

A debate within psychology about whether behavior is more influenced by personality traits or by situational factors.

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An approach to the study of human personality which focuses on the measurement of consistent patterns of behavior, thought, and emotion.

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An individual's view of themselves that is generally positive, reflecting a belief in one’s own abilities and self-worth.

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A psychologist best known for creating Maslow's hierarchy of needs, a theory of psychological health predicated on fulfilling innate human needs.

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