Note: Round your answers to the nearest cent. Big Mac Index: January 2019 Local Price Actual Exchange Rate Dollar Price (Foreign currency) (Dollars per unit of foreign currency) (Dollars) Euro area 4.08 1.12 Switzerland 6.50 1.01 United Kingdom 3.29 1.25 4.11 Poland 10.80 0.26 2.81 China 21.00 0.14 2.94 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 price of 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 rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom: $5.74 PPP Exchange Rate (U.S. Dollars per British pound) GBP 3.29 = $1.74 per pound The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Euro area (that is, the PPP exchange rate for Big Macs) is This change would mean that the euro had ▼ against the dollar. If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply. O Exporting Big Macs from the United Kingdom to Poland O Exporting Big Macs from Switzerland to China O Exporting Big Macs from the Euro area to the United States
Note: Round your answers to the nearest cent. Big Mac Index: January 2019 Local Price Actual Exchange Rate Dollar Price (Foreign currency) (Dollars per unit of foreign currency) (Dollars) Euro area 4.08 1.12 Switzerland 6.50 1.01 United Kingdom 3.29 1.25 4.11 Poland 10.80 0.26 2.81 China 21.00 0.14 2.94 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 price of 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 rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom: $5.74 PPP Exchange Rate (U.S. Dollars per British pound) GBP 3.29 = $1.74 per pound The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Euro area (that is, the PPP exchange rate for Big Macs) is This change would mean that the euro had ▼ against the dollar. If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply. O Exporting Big Macs from the United Kingdom to Poland O Exporting Big Macs from Switzerland to China O Exporting Big Macs from the Euro area to the United States
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:Note: Round your answers to the nearest cent.
Big Mac Index: January 2019
Local Price
Actual Exchange Rate
Dollar Price
(Foreign currency) (Dollars per unit of foreign currency)
(Dollars)
Euro area
4.08
1.12
Switzerland
6.50
1.01
United Kingdom
3.29
1.25
4.11
Poland
10.80
0.26
2.81
China
21.00
0.14
2.94
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 price
of 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 rate
at 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)
$5.74
GBP 3.29
%3D
= $1.74 per pound
The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Euro area (that is, the PPP exchange rate for
Big Macs) is
. This change would mean that the euro had
against the dollar.
If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage
opportunity? Check all that apply.
O Exporting Big Macs from the United Kingdom to Poland
O Exporting Big Macs from Switzerland to China
O Exporting Big Macs from the Euro area to the United States
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