The Economist magazine tracks the prices of the McDonalds Big Mac hamburger in countries around the world.

Question:

The Economist magazine tracks the prices of the McDonald’s Big Mac hamburger in countries around the world. The following table shows the prices of Big Macs in the United States and in six other countries, along with the exchange rate between that country’s currency and the U.S. dollar.

Big Mac price in domestic currency Exchange rate (units of foreign currency per U.S. dollar) Country United States $4.93 Japan 370 yen 118.65 Mexico 49 pesos 17.44 United Kingdom 2.89 pounds 0.68 China 17.60 yuan 6.56 Russia 114 rubles 74.68 Norway 46.8 kroner 8.97

a. Explain whether the numbers in the table are consistent with the theory of purchasing power parity.

b. Explain whether your results in part (a) mean that arbitrage profits exist in the market for Big Macs.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...