Case Study Unit 8
Case Study 20.1: The Big Mac Index
Question 1
McEachern explains the purchasing power parity theory as the notion that the exchange rate between two countries will conform as time goes by to maintain the cost between the countries in order to keep internationally traded goods as a bundle. (McEachern, 2012) Since the Big Mac is not traded on the international market this is not a good choice of a test of this particular theory. The cost of a Big Mac locally in many different countries compared to the U.S. has a much higher cost percentage. (McEachern, 2012) He also explains that many factors which do not level out over time could be a factor in the higher costs. (McEachern, 2012) Other countries’ currencies differ from the U.S. dollar and taxes, beef quotas, and trade barriers, often change local prices. (McEachern, 2012) The finished product for sale can vary significantly in cost based upon wages for restaurant workers in different countries. (McEachern, 2012) The cost of a Big Mac will never even out across different borders due to many of these factors. (McEachern, 2012)
McEachern, W. A. (2012). ECON Micro 3 (3rd ed.). Mason, OH; South-Western.
Case Study 20.2: What About China?
Question 1
McEachern explains that “many economists, politicians, and union officials argue that China manipulates its currency, the yuan, to keep Chinese products cheaper abroad and foreign products more expensive at home”. (McEachern, 2012) This multiplies the Chinese jobs and their ratio of production and the constant flocculation of imports and exports, according to McEachern. (McEachern, 2012) Many of China’s trading partners feel that the real goal of the Chinese is to slowly eliminate them by replacing them with Chinese producers, but they never gain any ground on China’s markets. (McEachern, 2012) Since China’s official exchange rate is constantly being undervalued compared to the U.S. dollar, it also continues to push the increase for demand of the dollar up.
Question 1
McEachern explains the purchasing power parity theory as the notion that the exchange rate between two countries will conform as time goes by to maintain the cost between the countries in order to keep internationally traded goods as a bundle. (McEachern, 2012) Since the Big Mac is not traded on the international market this is not a good choice of a test of this particular theory. The cost of a Big Mac locally in many different countries compared to the U.S. has a much higher cost percentage. (McEachern, 2012) He also explains that many factors which do not level out over time could be a factor in the higher costs. (McEachern, 2012) Other countries’ currencies differ from the U.S. dollar and taxes, beef quotas, and trade barriers, often change local prices. (McEachern, 2012) The finished product for sale can vary significantly in cost based upon wages for restaurant workers in different countries. (McEachern, 2012) The cost of a Big Mac will never even out across different borders due to many of these factors. (McEachern, 2012)
McEachern, W. A. (2012). ECON Micro 3 (3rd ed.). Mason, OH; South-Western.
Case Study 20.2: What About China?
Question 1
McEachern explains that “many economists, politicians, and union officials argue that China manipulates its currency, the yuan, to keep Chinese products cheaper abroad and foreign products more expensive at home”. (McEachern, 2012) This multiplies the Chinese jobs and their ratio of production and the constant flocculation of imports and exports, according to McEachern. (McEachern, 2012) Many of China’s trading partners feel that the real goal of the Chinese is to slowly eliminate them by replacing them with Chinese producers, but they never gain any ground on China’s markets. (McEachern, 2012) Since China’s official exchange rate is constantly being undervalued compared to the U.S. dollar, it also continues to push the increase for demand of the dollar up.