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The Big Mac Index and What About China - Case Study Example

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dollar to be undervalued against some currencies and overvalued against others. This finding seems to call for a rejection of the purchasing power parity theory. Explain why this…
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The Big Mac Index and What About China
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The Big Mac Index and What About China

Download file to see previous pages... tion of this theory is very simple and that states that the value of any particular good in one nation is equivalent to its value in other countries if one considers the same keeping in mind the concept of exchange rate of the currencies between those nations. But this is not always the case in real time. Big Mac Index, developed based on the prices of Big Mac in the USA and many other nations has proved that in various countries, the value of their currency is overrated compare to that of the USA where as in some other countries the currency is underrated in comparison to that of USA. In short run, the concept of PPP is not valid for various goods and the main reasons are organizations those are trading those items have to consider costs such as transportation cost, various kind of taxes such as VAT or government tax, Non traded service, competition in the existing market, Inflation etc. Along with all these factors, organization also needs to consider cost of labour while finalizing the price of the same. If one considers the case of Big Mac, in the USA, the labour cost is $ 8 per hour where as in China; the labour cost is as low as $ 1 per hours, so the final price of the Big Mac is far lower than that of the USA. So it is very clear that the PPP theory is not always applicable while comparing the price of various goods across the countries as there are number of others factors play an important role is deciding the price.
Many countries allow their currencies to grow at a slower pace compare to that of US Dollar or Euro. During 2013, the exchange rate of RMB was at $ 0.16. From 2005 onwards, Chinese government started allowing their currency to grow in a modest rate and in following five years, that is during 2005-2010, the Yuan rose total 20% in value compared to that of the US Dollar. The main reasons behind allowing the modest growth of the currency are: weaker exchange rates allows growth in the export as various countries like to purchase more goods from ...Download file to see next pagesRead More
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