The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?

Question

Quizplus · Accepted Answer

The Big Mac Index estimates the exchange rate based on the assumption that the burgers are the same across the world and should therefore cost the same. So, if a Big Mac costs $2.54 in the US and 294 yen in Japan, the estimated exchange rate would be calculated as follows:

$2.54 = ¥294/x (where x is the yen-dollar exchange rate)
x = ¥294/$2.54
x = ¥115.75/$

Therefore, the estimated exchange rate is ¥115.75 per dollar, which is answer choice D.

The Economist Publishes Annually the "Big Mac Index" by Which