McCurrencies

McCurrencies - Economics focus McCurrencies May 25th 2006...

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Economics focus McCurrencies May 25th 2006 From The Economist print edition Happy 20th birthday to our Big Mac index WHEN our economics editor invented the Big Mac index in 1986 as a light-hearted introduction to exchange-rate theory, little did she think that 20 years later she would still be munching her way, a little less sylph-like, around the world. As burgernomics enters its third decade, the Big Mac index is widely used and abused around the globe. It is time to take stock of what burgers do and do not tell you about exchange rates. The Economist 's Big Mac index is based on one of the oldest concepts in international economics: the theory of purchasing-power parity (PPP), which argues that in the long run, exchange rates should move towards levels that would equalise the prices of an identical basket of goods and services in any two countries. Our “basket” is a McDonald's Big Mac, produced in around 120 countries. The Big Mac PPP is the exchange rate that would leave burgers costing the same in America as elsewhere. Thus a Big Mac in China costs 10.5 yuan, against an average price in four American cities of $3.10 (see the first column of the table). To make the two prices equal would require an exchange rate of
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This note was uploaded on 04/26/2011 for the course ECON 102 taught by Professor Soffriti during the Spring '08 term at BU.

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McCurrencies - Economics focus McCurrencies May 25th 2006...

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