The Economist regularly publishes the Big Mac index to examine the validity of p

Question

The Economist regularly publishes the Big Mac index to examine the validity of purchasing power parity. If purchasing power parity holds, a consumer should be able to take the same amount of money required to buy a Big Mac in the U.S. and buy a Big Mac in any other country. What are the reasons purchasing power parity may not hold? If the U.S. dollar depreciates against the euro and purchasing power parity holds, would a Big Mac in Europe become more or less expensive? Why? If purchasing power parity doesn’t hold, does an American tourist in Europe pay more or less for a Big Mac? Why?

Explanation / Answer

The reason for purchase power parity is the increase in the demand and supply of the product. The labours are to be paid proper wages once revenues increases. When US dollars depriciates, the business is affected. The Euro would show increase in the purchase power parity due to decline in dollar. If it is not controlled then it would also affect business in Europe adversely. The would pay less for Big Mac.

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