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global financing and exchange rate mechanisms - Essay Example
Author : corwinara
Pages 4 (1004 words)
Topic: Big Mac Theory EXECUTIVE BRIEF: Pam Woodall, an economist, derived Big Mac index in 1986 to measure an informal estimate of Purchasing Power Parity between two currencies. It is the best way to fix cost to earn more profit in terms of currency exchange rates…
Big Mac was specifically under consideration because it was the only chain present in almost every country and have an affordable price, that can be dealt with an average income individual (Kotler & Armstrong, 2009). BIG MAC THEORY: Mc Donald’s best selling product is Big Mac. While hanging out with friends, or for lunch or dinner, people order mouth watering Big Mac with accessories. Big Mac Theory is a theory named to make this product, the most profiting product around the globe. The theory that stabilizes the Big Mac profit is the relationship between currencies, the United States Dollar (USD) with other foreign currencies at current exchange rates. Fed, an economist calls this exchange rate theory a game of achieving with currency rates. Big Mac theory tells us that the original exchange rate that is a nominal exchange rate was adjusted for the ratio of different prices to local prices that allows economists to compare the purchasing power of different currencies (Kotler & Armstrong, 2009). To make it clearer PPP Purchasing Power Parity of foreign currencies is measured by the use of Big Mac Theory. Local currency is used for price comparison and will convert it into USD. ...