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Hi can you guys help me ans the 3rd question? thanks. You are required to answer these questions as for your tutorial attendance. The Economist

Hi can you guys help me ans the 3rd question? thanks.

You are required to answer these questions as for your tutorial attendance.

The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same.

Q1: Describe the underlying theory of this situation.

Purchasing power parity (PPP) is based in The Law of One Price and refers to the situation where your income has the same purchasing power in all countries. The premise of the Big Mac Index is the idea that a Big Mac is the same across the globe. It has the same inputs and distribution system, so it should have the same relative cost from country to country. If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation of product between markets, the product's price should be the same in both markets.

Q2: If a Big Mac costs $3.73 in the United States and 320 yen in Japan, what is the exchange rate of yen per dollar as hypothesized by the Hamburger index?

320/3.73 = 85.80/1$

Q3: What is the direct exchange rate of dollar?

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