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

question 251

Essay

The "Big Mac Theory of Exchange Rates" tests the accuracy of the 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,explain how it would be profitable to buy Big Macs in Mexico instead of in the United States.

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Definitions:

Output Produced

The total amount of goods and services produced by an entity during a specific period.

Fixed Costs

Expenses that do not change with the amount of goods or services produced by a business, such as rent, salaries, and insurance.

Accounting Break-even

The point at which a business's revenues equal its expenses, resulting in no net profit or loss, as determined by accounting methods.

Contribution Margin

The amount by which sales revenue exceeds variable costs of production, indicating how much revenue contributes to fixed costs and profit.