If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is ________.

Question

Quizplus · Accepted Answer

To compare the prices of Big Mac in different countries, we use the theory of purchasing power parity (PPP), which states that exchange rates should adjust to equalize the prices of a basket of goods across different countries. According to the given information, the price of a Big Mac in the US is $3.41, which translates to 385.73 yen (3.41*113). Therefore, the PPP implies that the Big Mac in Japan should cost around 385.73 yen to be correctly priced. Since the actual price of a Big Mac in Japan is only 280 yen, it is underpriced.

If the Current Exchange Rate Is 113 Japanese Yen Per