Question: [ Related to Solved Problem 8 . 3 ] The Economist magazine tracks the prices of the McDonald's Big Mac hamburger in countries around the
Related to Solved Problem The Economist magazine tracks the prices of the McDonald's Big Mac
hamburger in countries around the world. The following table shows the price of Big Macs in the United States
and in five other countries, along with the exchange rate between that country's currency and the US dollar.
Source: "The Economist Big Mac Index," Economist, July
With respect to the theory of purchasing power parity, the statistics in this table are
A inconsistent since the domestic currency prices of Big Macs for the nonUS countries when
converted into dollars, differ markedly from $
B consistent since the domestic currency prices of Big Macs for the nonUS countries when
converted into dollars, would not differ from $ if transportation costs are included.
C inconsistent, since purchasing power parity implies that $ when converted into other currencies,
should be sufficient to just purchase a Big Mac in the nonUS countries.
D neither consistent or inconsistent, since purchasing power parity only applies to nontraded products.
E Both A and are correct.
If the purchasing power parity theory allowed us to exactly determine exchange rates in the short run, the
exchange rate between the South Korean won and the Swiss franc would be won per franc. Enter your
response rounded to three decimal places.
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