WEEK 3 Discussion 1
Need 250 words Initial Post and two replies of 100 words each. No Plagiarism. Due in 24 hours. I will attached the replies later.
Find the price of a Big Mac at a local McDonald’s. Compare your price for a local Big Mac against the “Big Mac Index” (http://www.economist.com/node/13055650?story_id=E1_TPDVVGVD). Select a country and in 200 to 250 words try to explain why there may be a discrepancy between the Big Mac Index based on the exchange rate and the actual price of a Big Mac.Be sure to respond to at least two of your fellow student’s posts.
Wen hao Li
Sunday6 Sep at 22:42
Week 3/Discussion 1,
Over here in the local McDonald’s in Tucson, the Big Mac is priced at $3.54. Based on the Big Mac Index, it seems like Norway has the costliest Big Mac priced at $5.79, and Malaysia has the cheapest Big Mac priced at $1.52 (The Economist, 2009).
Using the Big Mac Index, I chose to look at is Russia. The implied PPP of the dollar is the purchasing power parity, which presents the burger’s rates in both the U.S. and the country. For Russia, the implied PPP of the dollar is 17.5. 62.0 Rubles could buy a Big Mac compared to the U.S. at $3.54; therefore, 62 Rubles divided by $3.54 would equal 17.5 Rubles per dollar. The actual exchange rate is different. $3.54 is equivalent to 126.4 Rubles. As we can see, 126.4 Rubles divided by $3.54 would equal 35.7 Rubles per dollar.
There is a discrepancy between the exchange rate and the actual price of the Big Mac. The Big Mac is undervalued in Russia based on the burger is only $1.73. The currency is undervalued. This index is an excellent indicator of the differences in the value of money.
The Economist. (2009, February 4). Big Mac index (Links to an external site.) (Links to an external site.). Retrieved from http://www.economist.com/node/13055650?story_id=E1_TPDVVGVD
Tuesday8 Sep at 12:25
Created in 1986 as a guide to determine whether currencies are trading at their correct level based on their purchasing-power-parity (PPP), the Big Mac Index has eventually become a global standard used in making the exchange-rate theory more understandable. The PPP is based on a belief that exchange rates will subsequently equalize to a rate whereby the price of identical items would be the same in two different countries (The Economist, 2009).
The price for a Big Mac at the local McDonald’s restaurant I chose in Fayetteville, NC, was $3.99 compared to the US national average of $5.71, as indicated on the Big Mac Index. The country I chose for this exercise was Hong Kong, where the price of a Big Mac was HK$20.50 compared to $5.71 in the US with an implied exchange rate of 3.59 and an actual exchange rate of 7.75. An indication that the Hong Kong dollar is 53.7% undervalued. A sign that the purchasing-power-parity ratio for the exchange of Big Mac in Hong Kong is $1.00 = HK3.59.
The discrepancies identified in this transaction is a result of the Hong Kong dollar is undervalued. The PPP indicates that $1.00 equals HK3.59 therefore, the price of a Big Mac is cheaper in Hong Kong than in the US. The actual cost for a Big Mac in Hong Kong using the PPP calculations should have been below HK18.00 if it were not for the devaluation. These discrepancies are what bring the PPP notion of exchange rate equalization comes in play.
The Economist. (2009, February 4). Big Mac index (Links to an external site.) (Links to an external site.). Retrieved from http://www.economist.com/node/13055650?story_id=E1_TPDVVGVD (Links to an external site.)