Putting your mouse over a country gives you a list of information about Big Macs sold there including: There are a number of colored countries shown on the map. The website is an interactive tool that allows you to compare the prices of Big Mac Burgers purchased in various countries around the world. Purchasing power parity theory is applied to the current dollar price of Big Macs in countries around the world to determine the extent to which currencies are over- or under-valued. Information about local Big Mac prices has been combined with foreign exchange rates to serve as an unscientific indicator of future movements in currency exchange rates. Since 1986, The Economistmagazine has tracked the price of the Big Mac around the world. While the Big Mac is not strictly tradable between countries, it is sold to consumers in 116 countries around the world. Note that it works best for close substitutes that can be traded among countries over long periods of time. This price equalization is an example of purchasing power parity. Is the dollar price of cell phones equalized across the three countries at the new yen and pound prices? In our example, assuming given exchange rates, the yen price may rise to 18,837 yen, the dollar price may decline to $185.95, and the pound price may decline to 143.74 pounds.Ĩ. Purchasing power parity theory suggests that price adjustment will continue until the dollar price of cell phones is the same in each country. Conversely, cell phone prices in the United States and Great Britain will likely fall because of an increased supply (arising from more Japanese imports) of cell phones. This should cause the price of cell phones to rise in Japan (because, with increased exports to other countries, the demand for Japanese cell phones would increase). Purchasing power parity suggests that an entrepreneur could earn profits by purchasing cell phones in Japan and selling them to consumers in Great Britain and the United States.
In which country is the dollar price of the cell phone the highest?.Calculate the price of the cell phone in Great Britain.This is calculated by dividing 18000 yen by the yen-dollar exchange rate of 101.3 yen per dollar. The dollar price of the cell phone in Japan is $177.69.What is the exchange rate between the British pound and the United States dollar?.What is the exchange rate between the Japanese yen and the United States dollar?.In which country is the dollar price of the cell phone the lowest?.Suppose that the cell phone sells for $199.99 in the United States, 18,000 yen in Japan, and 180 pounds in Great Britain. The notion that a particular type of cell phone should sell for the same dollar price in the United States as it does in, say, Japan and Great Britain, makes sense if you think about supply and demand in world markets. While this theory naturally relies on certain assumptions (such as negligible transportation costs, that goods and services must be “tradable,” and that a good in one country does not differ substantially from the same good in another country) it is intuitively appealing. Economists refer to purchasing power parity to describe why, over time, the dollar price of a good in one country should equal its dollar price in all other countries.
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