[Solved] “The Big Mac Index” and “What About China?”

Please answer both (2) questions for the case study. Each question needs to be at least 150 words. Responses should be at least 150 words in length. You are required to use at least your textbook as source material for your responses. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.

 As you have already learned, the PPP theory predicts that in the long run the exchange rate between two currencies should move toward equalizing the cost in each country of an identical basket of internationally traded goods. A light-hearted test of the theory has been developed by The Economist magazine, which compares prices around ¹e world for a ‘market basket* consisting simply of one McDonald`s Big Mac—a product that, though not internationally traded, is essentially the same m more than 100 countries. The Economist begins with the price of a Big Mac in the local currency and then converts that price into dollars based on the exchange rate prevailing at the time. A comparison of the dollar price of Big Macs across countries offers a crude test of the PPP theory, which predicts that prices should be roughly equal in the long run.This chan lists the dollar price of a Big Mac in March 2010. in 22 surveyed countries plus the euro zone average. By comparing the price of a Big Mac in the United States (shown as the green bar) with prices in other countries, we can derive a crude measure of whether particular currencies. relative to the dollar, are ovenialued (red bars) or undervalued (blue bars). For example, because the price of a Big Mac in Norway, at $6.87. was 92 percent higher than the U.S. price of $3.58 the Norwegian krone was the most overvalued relative to the dollar of the countries listed. But Big Macs were cheaper in most of the countries surveyed.

The cheapest was in China, where $1.83 was 49 percent below the U.S. price. Hence, the Chinese yuan was the most undervalued relative to the dollar.
Thus. Big Mac prices in March 2010 ranged from 92 percent above to 49 percent below the U.S. price. The euro was 29 percent overvalued. The price range lends little support to the PPP theory, but that theory relates only to traded goods. The Big Mac is not traded internationally.