The Eurozone Norway United Kingdom Poland China Foreign Currency 7. Euro Kroner Pound Zloty Yuan Local Price (Foreign currency) 3.72 46.80 2.89 9.60 17.60 Big Mac Index: January 2016 Actual Exchange Rate (Dollars per unit of foreign currency) 1.10 0.12 1.63 0.36 0.16 Source: "Currency Comparison, To Go, The Economist, last modified January 7, 2016, accessed July 8, 2016, http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart- Dollar Price (Dollars) The law of one price 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 $4.93 into exactly GBP 2.89. 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: $4.93 GBP 2.89 = $1.71 per British pound Law of One Price Exchange Rate (U.S. Dollars per British Pound) = 4.71 3.46 2.82 ☐ Exporting Big Macs from the Eurozone to the United States ☐ Exporting Big Macs from Norway to China Exporting Big Macs from Poland to China The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Eurozone (that is, the law of one price exchange rate for Big Macs) is . For this change to happen, the euro would have to against the dollar. If Big Macs were a durable good that could be transported between countries at no cost, which of the following would present arbitrage opportunities? Check all that apply.
The Eurozone Norway United Kingdom Poland China Foreign Currency 7. Euro Kroner Pound Zloty Yuan Local Price (Foreign currency) 3.72 46.80 2.89 9.60 17.60 Big Mac Index: January 2016 Actual Exchange Rate (Dollars per unit of foreign currency) 1.10 0.12 1.63 0.36 0.16 Source: "Currency Comparison, To Go, The Economist, last modified January 7, 2016, accessed July 8, 2016, http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart- Dollar Price (Dollars) The law of one price 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 $4.93 into exactly GBP 2.89. 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: $4.93 GBP 2.89 = $1.71 per British pound Law of One Price Exchange Rate (U.S. Dollars per British Pound) = 4.71 3.46 2.82 ☐ Exporting Big Macs from the Eurozone to the United States ☐ Exporting Big Macs from Norway to China Exporting Big Macs from Poland to China The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Eurozone (that is, the law of one price exchange rate for Big Macs) is . For this change to happen, the euro would have to against the dollar. If Big Macs were a durable good that could be transported between countries at no cost, which of the following would present arbitrage opportunities? Check all that apply.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The Eurozone
7.
Norway
United Kingdom
Poland
China
Foreign Currency
Euro
Kroner
Pound
Zloty
Yuan
Local Price
(Foreign currency)
3.72
46.80
2.89
9.60
17.60
Big Mac Index: January 2016
Actual Exchange Rate
(Dollars per unit of foreign currency)
1.10
0.12
Source: "Currency Comparison, To Go," The Economist, last modified January 7, 2016, accessed July 8, 2016, http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart-
Law of One Price Exchange Rate (U.S. Dollars per British Pound)
1.63
0.36
0.16
The law of one price 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 $4.93 into exactly GBP 2.89. 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:
☐ Exporting Big Macs from the Eurozone to the United States
Exporting Big Macs from Norway to China
Exporting Big Macs from Poland to China
Dollar Price
(Dollars)
$4.93
GBP 2.89
= $1.71 per British pound
=
4.71
3.46
2.82
The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Eurozone (that is, the law of one price
exchange rate for Big Macs) is
▼. For this change to happen, the euro would have to
against the dollar.
If Big Macs were a durable good that could be transported between countries at no cost, which of the following would present arbitrage
opportunities? Check all that apply.
Transcribed Image Text:3. The Big Max index
Using data from The Economist's Big Mac Index for 2016, the following table shows the local currency price of a Big Mac hamburger 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 $4.93 in the United States and GBP 2.89 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was
$1.63 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 2.89 x
= $4.71
$1.63
GBP 1.00
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 to go
toward 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.)
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