The Purchase Power Parity: Big Mac.
Date Submitted: 09/10/2006 02:29:45
Category: / Business & Economy / Marketing and Advertising
Length: 2 pages (624 words)
Category: / Business & Economy / Marketing and Advertising
Length: 2 pages (624 words)
Purchasing Power Parity (PPP) is the exchange rate determination used to
compare the average cost of goods and services between countries. What this theory implies is that the actions of importers and exporters are motivated by cross country price differences influencing changes in the spot exchange rate. In essences what we have is transactions on one country's current account affects the value of the exchange rate on the foreign exchange market. The foreign exchange market …
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…An example of this is the hedge fund "Soros Fund Management" portfolio managers ignored the Big Mac index and oversold the product. The Euro tumbled and the Soros management fund fell hard (The Economist 2003).
The Big Mac Power Parity is not an exact measure because local taxes, levels of competition, and import duties on burgers may not be representative of the country's economy but is it widely used by economist to measure the global currency.
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