In April 2002, the price of a Big Mac in the UK was £1.99. Using data from The Economist's Big Mac Index for April 2002, the following table shows the local currency price of a Big Mac in several countries and the actual exchange rate. At the time, a Big Mac in the United States would have cost you 2.49 pounds. The actual exchange rate between the pound and the euro was £0.69 per British pound. The euro price of a Big Mac in the United States was, therefore, 2.49 British pounds x £0.69 per British pound = £1.71, which is less than you'd have paid in the UK. For the price you paid for a Big Mac in the UK, you could have purchased a Big Mac in the United States and had some change left over for french fries. Big Mac Index: April 2002 Country Local Price Actual Exchange Rate Argentina 2.49 pesos £0.23 per peso Brazil 3.6 reais £0.29 per real United States 2.49 pounds £0.69 per pound Euro zone 2.67 euros £0.62 per euro Poland 5.9 zloty £0.17 per zloty Switzerland 6.3 francs £0.42 per franc Source: "Big Mac Index," The Economist, 25 Apr 2002. Purchasing power parity (PPP) theory states that exchange rates should equalize the prices of goods in any two countries. For the euro price of a Big Mac to be the same in both countries, an American citizen would need to be able to convert £1.99 into exactly 2.49 pounds. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the UK by the price in the United States: £1.99 Z49 British pounds = £0.80 per British pound PPP Exchange Rate (U.S euros per British pound) = In April 2002, the pound price of a Big Mac in Switzerland was greater than y the pound price of a Big Mac in the UK. What exchange rate would have equalized the pound price of a Big Mac in the UK and Switzerland? That is, what is the PPP exchange rate for Big Macs? £1.99 per franc O £0.42 per franc O £3.13 per franc £0.32 per franc If exchange rates had been adjusted to bring about Big Mac PPP between the pound and the franc, the value of the franc would have would have against the pound, and the value of the pound against the franc.

In April 2002, the price of a Big Mac in the UK was £1.99. Using data from The Economist's Big Mac Index for April 2002, the following table shows the local currency price of a Big Mac in several countries and the actual exchange rate. At the time, a Big Mac in the United States would have cost you 2.49 pounds. The actual exchange rate between the pound and the euro was £0.69 per British pound. The euro price of a Big Mac in the United States was, therefore, 2.49 British pounds x £0.69 per British pound = £1.71, which is less than you'd have paid in the UK. For the price you paid for a Big Mac in the UK, you could have purchased a Big Mac in the United States and had some change left over for french fries. Big Mac Index: April 2002 Country Local Price Actual Exchange Rate Argentina 2.49 pesos £0.23 per peso Brazil 3.6 reais £0.29 per real United States 2.49 pounds £0.69 per pound Euro zone 2.67 euros £0.62 per euro Poland 5.9 zloty £0.17 per zloty Switzerland 6.3 francs £0.42 per franc Source: "Big Mac Index," The Economist, 25 Apr 2002. Purchasing power parity (PPP) theory states that exchange rates should equalize the prices of goods in any two countries. For the euro price of a Big Mac to be the same in both countries, an American citizen would need to be able to convert £1.99 into exactly 2.49 pounds. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the UK by the price in the United States: £1.99 Z49 British pounds = £0.80 per British pound PPP Exchange Rate (U.S euros per British pound) = In April 2002, the pound price of a Big Mac in Switzerland was greater than y the pound price of a Big Mac in the UK. What exchange rate would have equalized the pound price of a Big Mac in the UK and Switzerland? That is, what is the PPP exchange rate for Big Macs? £1.99 per franc O £0.42 per franc O £3.13 per franc £0.32 per franc If exchange rates had been adjusted to bring about Big Mac PPP between the pound and the franc, the value of the franc would have would have against the pound, and the value of the pound against the franc.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter11: Foreign Exchange, Trade, And Bubbles

Section: Chapter Questions

Problem 8MC

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Question

In April 2002, the price of a Big Mac in the UK was £1.99. Using data from The Economist's Big Mac Index for April 2002, the following table shows the local currency price of a Big Mac in several
countries and the actual exchange rate. At the time, a Big Mac in the United States would have cost you 2.49 pounds. The actual exchange rate between the pound and the euro was £0.69 per British
pound. The euro price of a Big Mac in the United States was, therefore, 2.49 British pounds x £0.69 per British pound = £1.71, which is less than you'd have paid in the UK. For the price you paid for a
Big Mac in the UK, you could have purchased a Big Mac in the United States and had some change left over for french fries.
Big Mac Index: April 2002
Country
Local Price
Actual Exchange Rate
Argentina
2.49 pesos
£0.23 per peso
Brazil
3.6 reais
£0.29 per real
United States
2.49 pounds
£0.69 per pound
Euro zone
2.67 euros
£0.62 per euro
Poland
5.9 zloty
£0.17 per zloty
Switzerland
6.3 francs
£0.42 per franc
Source: "Big Mac Index," The Economist, 25 Apr 2002.
Purchasing power parity (PPP) theory states that exchange rates should equalize the prices of goods in any two countries. For the euro price of a Big Mac to be the same in both countries, an American
citizen would need to be able to convert £1.99 into exactly 2.49 pounds. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the UK by the
price in the United States:
£1.99
2.49 British pounds
= £0.80 per British pound
PPP Exchange Rate (U.S euros per British pound)
In April 2002, the pound price of a Big Mac in Switzerland was greater than
the pound price of a Big Mac in the UK.
What exchange rate would have equalized the pound price of a Big Mac in the UK and Switzerland? That is, what is the PPP exchange rate for Big Macs?
£1.99 per franc
O £0.42 per franc
£3.13 per franc
£0.32 per franc
If exchange rates had been adjusted to bring about Big Mac PPP between the pound and the franc, the value of the franc would have
against the pound, and the value of the pound
would have
against the franc.

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