Suppose a McDonalds Big Mac cost $4.00 in the United States and 3.20 euros in the euro area and 5.20 Australian dollars in Australia.If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar,where does purchasing power parity hold according to the Big Mac index?

Question

Quizplus · Accepted Answer

Purchasing power parity holds when the price of the Big Mac is the same in different countries when converted to a common currency. In the euro area, 3.20 euros is equivalent to $4.27 (3.20 / 0.75), which is more than $4.00. In Australia, 5.20 AUD is equivalent to $4.00 (5.20 / 1.3), which matches the US price. Therefore, PPP holds in Australia but not in the euro area.

Suppose a McDonalds Big Mac Cost $4