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The price of a Big Mac in the United States is $3.99 whereas it is 20 yuan in China. The current exchange rate is $1:7
The price of a Big Mac in the United States is $3.99 whereas it is 20 yuan in China. The current exchange rate is $1:7 yuan.
- What do the data above suggest?
- If purchasing power parity (law of one price) holds, what should be the exchange rate between China and the United States?
- Now, what if the data change (the price of a Big Mac) from $4.25 whereas it is 30 yuan in China? The exchange rate is now $1:6 yuan. What has happened, and is it what you would expect based on purchasing power parity?
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