According to the "purchasing power parity (PPP)", a McDonald's Big Mac in the US should cost the same as:

Question

BlackTom AI · Accepted Answer

First, recall the concept of purchasing power parity (PPP): in the long run, exchange rates should adjust so that a basket of identical goods costs the same in each currency when priced in a common currency. The Big Mac is often used as a simple, comparable basket across countries to illustrate PPP.
Option a: 'none of these options.' This would be correct only if none of the listed statements matched PPP implications. Since PPP says prices should be equalized across countries when converted to a common currency, one of the options should reflect that equality with a US-dollar expression, so this option is unlikely to be correct.
Option b: 'a Big Mac purchased in the UK expressed in US dollars.' This choice directly reflects PPP’s idea: if you take the price of a Big Mac in the UK and convert it into US dollars, that converted price should be equal to the price of a Big Mac in the US, assuming PPP holds and ignoring transport costs, taxes, and other distortions. Therefore, expressing the UK price in USD aligns with the PPP comparison across currencies.
Option c: 'a Big Mac purchased in the UK expressed in UK pounds sterling.' Expressing the UK price in its own currency is not a cross-country PPP comparison; PPP is about price levels across currencies, so converting to pounds does not provide the direct US-variant price equality PPP seeks.
Option d: 'a Big Mac purchased in the UK, transported to the US, and consumed in the US.' This introduces transaction costs, transportation, and possibly tariffs or barriers, which PPP deliberately abstracts away from such frictions to compare domestic price levels. In practice, PPP focuses on identical goods priced in different currencies, not goods physically transported across borders for consumption, so this is not the standard PPP implication.
In summary, option b correctly encapsulates the PPP framework by comparing the UK price of a Big Mac, when expressed in US dollars, to the US price, thereby testing whether the two are equivalent after currency conversion. The other options misapply PPP by either failing to convert currencies for cross-country comparison, introducing unnecessary domestic pricing, or including transport costs that PPP typically excludes in its basic form.

According to the "purchasing power parity (PPP)", a McDonald's Big Mac in the US should cost the same as:Single choice

Similar Questions

The price of a Big Mac in the U.S. is $3.41 and the price in Mexico is Peso 29.0. What is the implied PPP of the Peso per dollar?

Assume the implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. Further, assume the current exchange rate is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is:

________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

Which of the following is NOT correct about the law of one price and the purchasing power parity (PPP) theory?

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