Under the ‘Law of One Price’, if a Big Mac costs US$4.99 in the US and £3.99 in the UK, then the GBP:USD exchange rate should be £1 = US$0.7995.

Question

Under the ‘Law of One Price’, if a Big Mac costs US$4.99 in the US and £3.99 in the UK, then the GBP:USD exchange rate should be £1 = US$0.7995.

BlackTom AI · Accepted Answer

Purchasing Power Parity (the Law of One Price) states that the exchange rate between two currencies should equal the ratio of the price of the same good in those two currencies.

1. Relevant knowledge points and concepts
- Law of One Price / Purchasing Power Parity (PPP): identical goods should cost the same when prices are expressed in a common currency.
- If P_US is price in USD and P_UK is price in GBP, then the implied exchange rate (USD per GBP) = P_US / P_UK.
- Notation GBP:USD as “£1 = US$X” means we want USD per one GBP.

2. Step-by-step reasoning
We have P_US = US$4.99 and P_UK = £3.99. To express how many US dollars one British pound buys, divide the dollar price by the pound price.

3. Calculations with intermediate steps
- Set up ratio: USD per GBP = 4.99 / 3.99.
- Convert to integers: 4.99 = 499/100, 3.99 = 399/100, so 4.99 / 3.99 = (499/100) / (399/100) = 499 / 399.
- Long division (499 ÷ 399):
  - 399 × 1 = 399 → remainder 100
  - 1000 ÷ 399 = 2 → remainder 202
  - 2020 ÷ 399 = 5 → remainder 25
  - 250 ÷ 399 = 0 → remainder 250
  - 2500 ÷ 399 = 6 → remainder 106
  - So the decimal begins 1.250626...
- Rounded to four decimals: approximately US$1.2506 per £1 (commonly US$1.25).

4. Why the correct answer is correct
The claim in the question stated £1 = US$0.7995. That value equals 3.99 / 4.99 (i.e., GBP price divided by USD price), which is the inverse of the correct ratio. PPP requires USD/GBP = 4.99/3.99 ≈ 1.25, not 0.7995.

5. Why the other option is incorrect
- “True” is incorrect because it uses the reciprocal ratio. Using 3.99/4.99 gives ~0.7996 USD per GBP, which would mean a pound is worth less than a dollar in this context — contrary to the correct PPP computation.

6. Conclusion
The statement is False. The correct implied exchange rate is about £1 = US$1.25, so the provided figure US$0.7995 is incorrect. This matches the provided answer: False.

Under the ‘Law of One Price’, if a Big Mac costs US$4.99 in the US and £3.99 in the UK, then the GBP:USD exchange rate should be £1 = US$0.7995. True/False

Similar Questions

According to the law of one price, which good or service is likely to have a larger price difference in different countries?

According to the law of one price, which good or service is likely to have a larger price difference in different countries?

According to the law of one price, which good or service is likely to have a larger price difference in different countries?

According to the law of one price, which good or service is likely to have a larger price difference in different countries?

If a Big Mac costs £3.50 in the UK and US$4.99 in the US. According to the Law of One Price, what should the GBP/USD exchange rate be, per an indirect quotation, expressing the value of £ in terms of US$?

Choose A, B, C or D as the best answer.30. The author’s main argument is that __________.

What does the underlined word in the text refer to?Write ONE WORD from the text to complete the sentences.24. ‘which’ in paragraph 5 refers to Answer Question 12[input].

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler