2016-01-21 - zip-modern58’s diary
Considering the table above, the activities of Brazilian fast-out outlets exchanging Brazilian real for the US dollar to exploit the price arbitrage, the value of the real will lose value (depreciate) and the dollar will gain value (appreciate). Noteworthy, exploiting the Big Mac alone does not influence a nation’s exchange rate, but if the concept is applied to the whole economy (theoretically) may affect the exchange rate to restore parity. For instance, if the price of products or services is high in Brazil relative to similar products and services in the United States, consumers in the United States will go to their domestic products and services over the Brazilian products and services. The loss of interest will in turn force Brazilian traders to lower the price of their products to boost their sales. Alternatively, the Brazilian central bank mat employ a monetary policy that allows the real to depreciate against the United States dollar so that buyers in the US pay lesser to buy products from Brazil (Kandil and Mirzaie 17).
Monetary policy is overseen by Central Banks (Labonte and Makinen 1). For a government to control inflation, the central bank raises the interest rate on loans and reserve rates for banks thereby minimizing the amount of money in circulations. Under recession, the Central bank lowers the interest rates to encourage lending by the bank and public borrowing from banks. Eventually, the money in supply is increased. Unlike the monetary policy, fiscal policy is determined by the administration in place (Labonte and Makinen 4). It is also typified by changes in taxing and spending of the government.
In summary, the Big Mac Index is a simplified indicator of an economy’s purchasing power. The standardized Big Mac prices are computed by converting the national Big Mac prices with the latest exchange rate for the United States dollars. A stable and stronger currency results in the good trade balance and trade sustainability. Stability and growth of the Brazilian real against the U.S dollar can be triggered by expansionary fiscal and monetary policies introduced by the Brazilian Central Bank. Currency stability also means that the Brazilian GDP will be sustainable, leading to economic growth.
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Sometimes, analysts use the price of specific products in different locations to compare currency valuation and purchasing power. For example, the Big Mac Index compares the purchasing power parity of many countries based on the price of a Big Mac. Locate the latest edition of this index that is accessible. Identify the five countries (and their currencies) with the lowest purchasing power parity according to this classification. Which currencies, if any are overvalued. What Awaits you: On-time delivery guarantee Masters and PhD-level writers Automatic plagiarism check 100% Privacy and Confidentiality High Quality custom-written papers
Big Mac Index
The Big Mac Index or the Big Mac PPP is an informal approach to measuring or computing the purchasing power parity (PPP) between currencies (McEachern 443). The Big Mac is used for comparison because it is a top-selling McDonald’s burger and, it is available in almost all countries. In addition, it is prepared to a standardized quality, size and composition (Statista para. 4). PPP is a technique for determining, the relative value of various currencies. In essence, the Big Mac Index is designed to simplify the exchange rate theory. According to McEachern (443), the concept of PPP suggest that changes the price of a basket of goods (constant across borders in terms of quantity or quality) is affected by fluctuations in exchange rates between countries. Theoretically, the Big Mac PPP suggests that any changes in the exchange rate between two currencies (for example, the US dollar versus Euro), should have an effect on the price consumers pay in exchange for similar products or services (a Big Mac) in a given nation. Table 1 below illustrates the measurement of PPP using January 2015 exchange rates (Big Mac Index para. 1).
Purchasing Power Parity Analysis ..
The Economist publishes the Big Mac Index in an informal method of valuing the purchasing power parity of two different currencies. Additionally, the Big Mac Index gives a provision test for the extent at which the exchange rates in the market lead to the same cost of goods in different countries. It looks to make the concept behind the exchange rate theory more understandable.
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The difference between the prices of a product in one country compared to the landed cost in another is referred to as the differential grey market. If the differential grey market exhibits a positive rate, then this implies that the landed cost from the other country is lower compared to the price of the product from in the serving country. In this case, the Big Mac index uses this premise to purchase product materials internationally as a means of incurring fewer costs for the product compared to if it was purchased in the serving country. This therefore, serves to manage the risk of incurring extra costs by increasing overall profits.