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W9 presentation - The Economist's Big Mac index seeks to...

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The Economist's Big Mac index seeks to make exchange-rate theory more digestible. It is arguably the world's most accurate financial indicator to be based on a fast-food item. Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued. A strong version of the PPP theory has as its foundation the law of one price . Abstracting from complicating factors such as transportation costs, taxes, and tariffs, the law of one price states that any good that is traded on world markets will sell for the same price in every country engaged in
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W9 presentation - The Economist's Big Mac index seeks to...

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