Which of the following is the concept behind the Big Mac index?
A) Purchasing power parity
B) Fixed exchange rate policy
C) Balance of payments
D) Currency swap

Question

Quizplus · Accepted Answer

The Big Mac index is a measure of purchasing power parity, which is the notion that exchange rates between currencies should adjust in the long run to equalize the prices of a basket of goods and services in different countries. The Big Mac is used as a proxy for this basket of goods, as McDonald's restaurants are found in almost every country, and the Big Mac is a standardized product with consistent ingredients and production methods. The index compares the price of a Big Mac in different countries and calculates the implied exchange rate between their currencies, which can be compared to the actual exchange rate to assess whether a currency is overvalued or undervalued. The concept behind the Big Mac index is purchasing power parity, which suggests that exchange rates should adjust to equalize the cost of a basket of goods and services across countries. The Big Mac index uses the price of a Big Mac burger in different countries to compare the relative value of different currencies. If the price of a Big Mac is higher in one country than another, it suggests that the currency of the country with the more expensive burger is overvalued relative to the other currency.

Which of the Following Is the Concept Behind the Big