We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Nobody downloaded yet

Purchasing Power Parity and the Big Mac Index - Essay Example

Comments (0) Cite this document
Summary to essay on topic "Purchasing Power Parity and the Big Mac Index"
When we go at a shop to buy something, we expect to get that product at a value we perceive to be associated with it. Also when we travel abroad, we expect the same product to cost us the same value that we get in the home country. Investopedia defines this phenomenon as the Purchasing Power Parity which in economic terms is a "theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power."
Download full paper
Polish This Essay
Purchasing Power Parity and the Big Mac Index
Read TextPreview

Extract of essay "Purchasing Power Parity and the Big Mac Index"

Download file "Purchasing Power Parity and the Big Mac Index" to see previous pages... On the other hand, a US Dollar has more purchasing power than a Pakistani or Indian Rupee. These differences are usually because of availability and demand for the goods amongst other factors. By taking an international measure and determining the cost for that measure in each of the two currencies and comparing them we can solve this problem.
Let us write or edit the essay on your topic "Purchasing Power Parity and the Big Mac Index" with a personal 20% discount.. Try it now
(McGuigan, 2008)
This formula represents the exchange rate of one currency in relative terms to another currency. P1 is the price of an item in one currency while P2 is the price of the same item in another currency (Investopedia, 2008).
Although according to this theory, the relative prices for a same product should be equal in two different locations. However we rarely see this happen. This theory doesn't even hold true in areas inside a city. For example in a high end posh area of a city might sell the same product at a much higher rate than the shop set up in a low end area.
This brings us to the most popular example of purchasing power parity, the Big Max Index. Calculated by the Economist Magazine, the Big Mac index is used to find the exchange rate to determine the value of other items. Since McDonalds is virtually in every country, this index is readily applicable. All we need is the price of Big Mac in the two countries we need to find the exchange rate of. For example a Big Mac in US costs around $4 while a Big Mac in India costs Rupees 200 thus the index will be $1 equivalent to Rs. 50. This index is used further to get an idea of the actual exchange rate in the market and to determine the relative value of other items. (McGuigan, 2008)
The main use of the index is to find the GDP and hence the standard of living of the people in a certain location. When we are determining the Gross Domestic Product of a country, a fall in the value of the currency relative to another base currency, will make the GDP fall by the same value. Taking the same example of the Indian Rupee and the US Dollar, a fall in the Rupee by 50%, will force the GDP expressed in US dollars to drop to 50%. This piece of information does not reflect true picture of the situation since the devaluation of the Indian currency maybe due to the international trade issues. However when we look at each day's exchange rates of the Dollar to the Rupee, we see fluctuations coming each day. But when we use the Big Mac index, these fluctuations are not reflected into the price of Big Mac each day. The price of the Big Mac remains to be Rs. 200 for quite a while even though the value of Dollar is increasing.

Purchasing Power Parity - Analysis
When we talk about the long-run, the purchasing power parity theory tells us that differences in the prices of the items in different countries are not sustainable as forces acting in the market place will equalize prices between countries and change exchange rates in doing so. Consider an example of a person who finds that the price of tomatoes is $5 lesser in another state. Traveling to the other state will cost the person $50 in fuel, thus just to save $5, this trip will incur a loss to the person. But when you consider bulk purchase this scenario comes out to be completely ...Download file "Purchasing Power Parity and the Big Mac Index" to see next pagesRead More
Cite this document "Purchasing Power Parity and the Big Mac Index"
  • APA
  • MLA
(“Purchasing Power Parity and the Big Mac Index Essay”, n.d.)
Retrieved from https://studentshare.org/miscellaneous/1501371-purchasing-power-parity-and-the-big-mac-index
(Purchasing Power Parity and the Big Mac Index Essay)
“Purchasing Power Parity and the Big Mac Index Essay”, n.d. https://studentshare.org/miscellaneous/1501371-purchasing-power-parity-and-the-big-mac-index.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC "Purchasing Power Parity and the Big Mac Index"
Purchasing Power Parity
I. Purchasing Power Parity 1) Generating Eviews work file By inspecting the dataset Data_Canada_PPP.xls, it is analysed that the data consists of 3 series Exchange_rate (Canadian dollar to US dollar nominal exchange rate), CPI_Can (Canadian Consumer Price Index) and CPI_US (the US Consumer Price Index) that are observed every month from the year 1990/1 till 2011/3.
60 Pages(15000 words)Essay
Global financing and exchange rate mechanisms
Later, UBS Wealth management elaborated the idea of deciding labor wages in any country with a theory that wages should be kept in an amount that he can earn to afford one Big Mac daily in the similar country (Kennedy, 2006). It was suggested that Big Mac index should be used for the Prediction of exchange movement in different countries is termed with a Big Mac that the price of Big Mac should be kept same in every country in exchange rates.
4 Pages(1000 words)Essay
Parity Theories
Running Head: Parity Theories Parity Theories [Writer’s Name] [Institute’s Name] Parity Theories Purchasing Power Parity Theory Purchasing power parity theory of exchange rate is based on the idea of equivalence in the purchasing power of countries, which leads to equilibrium in the exchange rate between the currencies of countries.
8 Pages(2000 words)Essay
Economics Coursework Assignment: Big Mac
BigMac index is used to measure the purchasing power parity of various different currencies all over the world. Incidentally, this paper is also going to use Big Mac (a product of McDonald’s) and will consider various microeconomic and macroeconomic factors that determine its demand and supply.
6 Pages(1500 words)Essay
Discuss the theory of purchasing power parity, by considering its various forms and examining critically its assumptions and the
The Purchasing Power Parity refers to a theory of economics, which is used to estimate the adjustment that should be applied on the rate of exchange between nations. The main aim of using the theory to estimate the equilibrium emanates from the desire to ensure harmonisation in the exchange, as well as meet the purchasing power of each of the countries.
10 Pages(2500 words)Essay
Power Purchase Parity
This paper looks at the definitions of exchange rates and relative pricing as well as their relationship in purchase power parity to discover if the hypothesis of purchase power parity is true. The purchase power parity hypothesis is based on the law of one price, that the equilibrium of trade between boundaries is constant.
14 Pages(3500 words)Essay
Purchasing Power ParityBig Mac Index
Developed in the early 1900s by a man named Gustav Cassel, this theory was based on the idea that in an ideal world with an efficient market, the same goods should have the same price universally. The law of one price, which is the building block of the theory of the purchasing power parity, states that, "under free competition and in the absence of trade impediments, a good must sell for a single price regardless of where in the world it is sold" (Krugman and Obstfeld, 2000).
4 Pages(1000 words)Essay
The Exchange Rate Regime of Thailand, purchasing power parity of Thailand
Malay, Mon and Khmer civilizations flourished in the reason prior to the arrival of ethnic “Tai”. Geographically the area of Thailand is 513,115 sq. km; equivalent to the size of France, or slightly smaller than Texas. Beautiful city of Bangkok is the capital of
16 Pages(4000 words)Essay
Purchasing power parity
It is based on the law of one price, the idea that, in an efficient market, identical goods must have only one price. Purchasing power parity is often called
7 Pages(1750 words)Essay
Question and answer
ends that change in transaction rates among currencies should influence the price that customers recompense for a Big Mac in certain, replacing the “basket” with the famous hamburger. The weakness of the Big Mac is not an internationally tradable commodity in that countries
2 Pages(500 words)Essay
Let us find you another Essay on topic Purchasing Power Parity and the Big Mac Index for FREE!
Contact us:
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us