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The theory requires that the goods should be tradable to enable high cost countries to import goods from low-cost countries; therefore, forcing currency values back to purchasing power parity.
The big mac index has relevance because although there are other methods of comparing efforts the Big Mac index receives a lot of attention. For example, the United Nations and the OCED are involved in the International Price Comparison Programme, which analyses a wide range of prices; hence, producing more demanding estimates of the exchange rates that would eradicate price dissimilarities between their members (Carbaugh 394).
I would not substitute it with a basket of goods index because it reflects more than just the cost of meat, bread and vegetables, but also non-tradable elements such as labor and rent; hence, comparing countries roughly at the same stage of development. The basket of goods looks at the non-tradable imports and services indicating that they should be alike in different countries.
The global consumption habits can be derived by establishing the international correlation risk where inequalities in food consumption should be determined. The basket of goods reflects the inequality in food consumption where the little there is in the food basket it reflects how the global market is working.
The between link currency and international trade is determined by various factors such as differential inflation where a country with low inflation rates exhibits a rising currency values. Secondly, the link between the two is differential interest rates where exchange, interest, and inflation rates are highly correlated because by manipulating interest rates the central banks exert influence over inflation. Additionally, the link between currency and international trade is brought about by public debt and current account deficits where some countries work with money that they do not have in
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