Part 1The Economist magazine is famous for its publication of the Big Mac indexlong dash—a table of Big Mac Superscript TM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world.Part 2Given the following abbreviated table:[table]
Country | PriceBig Mac China | 12,000 yuan Indonesia | Rp. 20,000 U.K. | pound£1.25 U.S. | $2.50
[/table]Part 3If the law of one price holds, what are the following implied exchange rates?$[input]enter your response here = pound£1.00. (Round your response to the nearest cent.)

Question

Part 1The Economist magazine is famous for its publication of the Big Mac indexlong dash—a table of Big Mac Superscript TM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world.Part 2Given the following abbreviated​ table:[table]
Country | PriceBig Mac China | ​ 12,000 yuan Indonesia | Rp.​ 20,000 U.K. | pound£1.25 U.S. | ​$2.50
[/table]Part 3If the law of one price​ holds, what are the following implied exchange​ rates?​$[input]enter your response here ​= pound£1.00. ​(Round your response to the nearest​ cent.)

BlackTom AI · Accepted Answer

We are given a Big Mac price comparison across countries to apply the law of one price. This law asserts that identical goods should have the same price when expressed in a common currency, so exchange rates can be derived from price ratios.
First, identify the prices in the two currencies involved: the United States price is $2.50, and the United Kingdom price is £1.25.
Next, to find the implied exchange rate dollar per pound, divide the price in dollars by the price in pounds: 2.50 / 1.25.
Carrying out the calculation gives 2.50 ÷ 1.25 = 2.0.
Thus, the implied exchange rate is the amount of dollars required to buy one pound, which equals 2.00 dollars per £1.00.
This uses only the US and UK Big Mac prices; the same principle would apply if we used prices from other countries, comparing their local currency price to the US price to derive additional implied exchange rates. If you instead asked for other currency pair rates (e.g., yuan per dollar), you would perform analogous price-ratio calculations using the corresponding country prices.

Homework:Chapter 20 Homework

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