We discussed how costs of living are different in different countries and a mere conversion of currencies using exchange rates might not give a full picture of living comparisons. For that reason, we will use the Big Mac Index that was invented by The Economist in 1986 to guide whether currencies are at their correct level using the theory of purchasing power parity. The following Table 1 reports the price of a Big Mac from five countries as of Jan 12, 2021 and the corresponding official exchange rates. Use the information provided in Table 1 to fill out the rest of the information and answer the questions below: Table 1: PPP and Exchange Rates Country Price in local currency Exchange Rate Purchasing Power Parity (PPP) United States 5.66 1 Britain 3.29 0.74 Sweden 52.88 8.30 Norway 52 8.54 Mexico 54 20.11 Based on your calculations in Table 1, the PPP rate for Sweden is: 9.34 1.13 6.37 0.89 Which of the following statements is correct from your calculations in Table 1? US$ 1 gives you 9.24 Mexican pesos after PPP-adjustment. The exchange rate between the U.S. and Mexico is US$ 1 = 20.11 pesos, but you get roughly 53% more in Mexico for your one U.S. dollar. The British Pound is worth less than the US$1 None of the above. Which of the following statements is incorrect about exchange rate and PPP rate? Exchange rate is the rate at which currencies are exchanged. The PPP gives us the rate at which one country’s currency would have to be converted to another country’s currency in order to buy the same amount of goods and services. When you travel internationally, the exchange rate determines how much your USD is worth in the country that you are visiting. Non-tradable goods and services tend to be cheaper in developing countries, so it is better to use exchange rates than PPP to adjust for cost of living differences.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter34: International Finance

Section: Chapter Questions

Problem 5QP

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We discussed how costs of living are different in different countries and a mere conversion of currencies using exchange rates might not give a full picture of living comparisons. For that reason, we will use the Big Mac Index that was invented by The Economist in 1986 to guide whether currencies are at their correct level using the theory of purchasing power parity. The following Table 1 reports the price of a Big Mac from five countries as of Jan 12, 2021 and the corresponding official exchange rates. Use the information provided in Table 1 to fill out the rest of the information and answer the questions below:

Table 1: PPP and Exchange Rates

Country	Price in local currency	Exchange Rate	Purchasing Power Parity (PPP)
United States	5.66	1
Britain	3.29	0.74
Sweden	52.88	8.30
Norway	52	8.54
Mexico	54	20.11

Based on your calculations in Table 1, the PPP rate for Sweden is:
- 9.34
- 1.13
- 6.37
- 0.89

Which of the following statements is correct from your calculations in Table 1?

US$ 1 gives you 9.24 Mexican pesos after PPP-adjustment.
The exchange rate between the U.S. and Mexico is US$ 1 = 20.11 pesos, but you get roughly 53% more in Mexico for your one U.S. dollar.
The British Pound is worth less than the US$1
None of the above.

Which of the following statements is incorrect about exchange rate and PPP rate?
1. Exchange rate is the rate at which currencies are exchanged.
2. The PPP gives us the rate at which one country’s currency would have to be converted to another country’s currency in order to buy the same amount of goods and services.
3. When you travel internationally, the exchange rate determines how much your USD is worth in the country that you are visiting.
4. Non-tradable goods and services tend to be cheaper in developing countries, so it is better to use exchange rates than PPP to adjust for cost of living differences.

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