8. Purchasing-power parityUsing data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well asthe actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in theUnited States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. Thedollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:Dollar price of a Big Mac in the United Kingdom = GBP 3.29 X= $4.11For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left overfor fries!Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given.Note: Round your answers to the nearest cent.BrazilSwitzerlandUnited KingdomPolandChinaLocal Price(Foreign currency)17.506.503.29$1.25GBP 1.0010.8021.00Big Mac Index: January 2019Actual Exchange Rate(Dollars per unit of foreign currency)0.261.011.250.260.14Dollar Price(Dollars)4.112.812.94Source: "The Big Mac Index, Our Interactive Currency Comparison Tool," The Economist, last modified January 10, 2019, accessed September 27, 2019,https://www.economist.com/news/2018/07/10/the-big-mac-index Source: "The Big Mac Index, Our Interactive Currency Comparison Tool," The Economist, last modified January 10, 2019, accessed September 27, 2019,https://www.economist.com/news/2019/07/10/the-big-mac-index.Purchasing-power parity (PPP) theory states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar priceof a Big Mac to be the same in both countries, a U.S. citizen would need to be able to convert $5.74 into exactly GBP 3.29. To find the exchange rateat which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom:PPP Exchange Rate (U.S. Dollars per British pound)$5.74GBP 3.29= $1.74 per poundThe exchange rate that would have equalized the dollar price of a Big Mac in the United States and Brazil (that is, the PPP exchange rate for Big Macs). This change would mean that the real hadisagainst the dollar.If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrageopportunity? Check all that apply.Exporting Big Macs from Switzerland to ChinaExporting Big Macs from the United Kingdom to PolandExporting Big Macs from Brazil to the United States

Purchasing power parties (PPPs) are the rates of currency change that try to equalize the purchasing…

asing-power parity Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: Dollar price of a Big Mac in the United Kingdom = GBP 3.29 x = $4.11 For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries! Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given. Note: Round your answers to the nearest cent. Brazil Switzerland United Kingdom Poland China $1.25 GBP 1.00 Local Price (Foreign currency) 17.50 6.50 3.29 10.80 21.00 Big Mac Index: January 2019 Actual Exchange Rate (Dollars per unit of foreign currency) 0.26 1.01 1.25 0.26 0.14 Dollar Price (Dollars) 4.11 2.81 2.94 Source: "The Big Mac Index. Our Interactive Currency Comparison Tool." The Economist, last modified January 10, 2019 accessed September 27 2019

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 6PA