Finance 40500: International Finance

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Presentation transcript:

Finance 40500: International Finance PPP and the Big Mac

We can actually think of a Big Mac as an index of commodity prices

Relative dollar Prices (PPP = 100) Foreign Currency per Dollar

As an index, the Big Mac index works pretty well.

These figures suggest that deviations from PPP are very persistent!

These figures are looking at European currencies during the ERM relative to the German Mark

Relative PPP (PPP = 0) Foreign Currency per Dollar

As earnings rise, prices increase As earnings rise, prices increase. In particular, the non-traded component of prices increases. This should cause an overvaluation of wealthy country’s currencies relative to poorer countries.