Principles of Economics- Mankiw (5th) 653

Principles of Economics- Mankiw (5th) 653 - CHAPTER 29...

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CHAPTER 29 OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 675 CASE STUDY THE HAMBURGER STANDARD When economists apply the theory of purchasing-power parity to explain ex- change rates, they need data on the prices of a basket of goods available in dif- ferent countries. One analysis of this sort is conducted by The Economist, an international newsmagazine. The magazine occasionally collects data on a bas- ket of goods consisting of “two all beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame seed bun.” It’s called the “Big Mac” and is sold by McDonald’s around the world. Once we have the prices of Big Macs in two countries denominated in the local currencies, we can compute the exchange rate predicted by the theory of purchasing-power parity. The predicted exchange rate is the one that makes the cost of the Big Mac the same in the two countries. For instance, if the price of a Big Mac is $2 in the United States and 200 yen in Japan, purchasing-power par-
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