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![Page 1: Big Macs and Foreign Exchange in looking at Global Trade Council for Economic Education Conference: Baltimore, MD October 5, 2013.](https://reader036.fdocuments.net/reader036/viewer/2022082610/56649d8e5503460f94a76b76/html5/thumbnails/1.jpg)
Big Macs and Foreign Exchange in looking at Global Trade
Council for Economic EducationConference: Baltimore, MD
October 5, 2013
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International prices and wage comparisons
• A tricky area indeed to understand as well as to teach
• A look at PPP• Purchasing- power parity• How we use it?• Why use it?• Link it to class and topics in studying global
trade, for both AP economics and economics
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Burgernomics!
• The Economist has used the BIG MAC for years as its way to analyze foreign exchange rates
• As they put it, the ‘secret sauce’ of their analysis is the theory of purchasing-power parity.
• Which begs the question, what is purchasing-power parity?
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Our basket of good and service to analyze has just ONE item: BIG MAC!
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Purchasing-power parity
• It is looking at two nations currencies at the “nominal” exchange rate at which a given market basket of goods and services would cost the same amount in each nation.
• Instead of using a market basket of a variety of goods and services, the Big Mac index uses one:
• The Big Mac! ( Except in India…)
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Why look at the Big Mac index?
• It is useful and an easier way to illustrate a key area in open economies or studying the foreign exchange market
• International exchanges require a market—the foreign exchange market—in which currencies can be traded for each other.
• The price at which these trades are made are known as the exchange rate.
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$/YenYen/$
USDYen
D$
S$
DYen
SYen
D$1 SYen1
Currency Markets Supply and Demand
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• Let’s take a look at foreign exchange rates and use this activity:
• THE FOREIGN EXCHANGE MARKET1. Skim over the first side of this APE handout.2. Working together ( if possible ) and use your
brain or calculator-----find the changes in currency values from May to August and see if
3. the currency APPRECIATED or DEPRECIATED!
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Some observations to be noted..
• When a currency appreciates or depreciates, it changes the price of imports and exports.
• Why is this critical to understanding foreign trade?
• Depreciation or appreciation of a currency will impact the economy since it impacts net exports.
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So, is there another way to look at this issue of exchange and currency values?
• Yes, why yes there is!• Let’s look at the BIG MAC!
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Let’s compare using the Big mac index
• We will look at a few nations to see whose currency is under or over valued against the dollar ( BIG MAC )
• Volunteers?• Let’s put them in order with the US in the
middle to represent the average base price of the sandwich
• Use handout A to see the table and let’s put these volunteers in their place!
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Results?
• Which nations are above ( overvalued ) v the Big Mac?
• Which nations are below ( undervalued ) v the • Big Mac?• What is the average price in the US?• Highest one in our simulation? On the chart?• Lowest one in our simulation? On the chart?
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Let’s go to real time and calculate the prices and see who is over or under valued?
• Using the activity from EconEdLink, we are going to use current prices, world capitals and Big Macs to look at selected currencies.
• 1. Work with a partner• 2 In our session, we can use a calculator ( but
in class, decide if you want to or not )• 3. We are going to look at 10 nations, capitals
and currencies
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Using these nations, what are their capital cities?
• Australia?• Denmark?• Argentina?• Mexico?
• Sweden?• Malaysia?• Italy?• Thailand?• Hungary?
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And the answers are:
• Australia ( Canberra )• Denmark ( Copenhagen)• Argentina ( Buenos Aires)• Mexico ( Mexico City )
• Sweden ( Stockholm )• Malaysia ( Kuala Lumpur)• Italy ( Rome )• Thailand ( Bangkok)• Hungary ( Budapest )
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As we move to end this session, let us consider…..
• Purchasing power parity is a theory and model of exchange rate determination.
• The Big Mac index developed by The Economist is a fun way to study a tradable good and prices between locations in different nations.
• It can add to your teaching of exchange rates and open economies/global trade
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Suggestions for additional resources
• The Economist. Search their website for more as well as print issues ( www.economist.com )
• www.econedlink.org/lessons for the lesson on the Big Mac index
• Youtube.com has several clips on purchasing power parity for you as a teacher to look over for enrichment or learning
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Textbooks
• Krugman’s Macroeconomics for AP. Ray, Anderson, Krugman and Wells. BFW Worth. 2013. Pages 427-428.
• Economics: Principles in Action. Sullivan and Sheffrin. Prentice Hall. 2008. pages 458-461.
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APE materials to consider
• Advanced Placement Macroeconomics: Student Resource Material.
• Lesson 7-3.
• CEE. 2012
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Thank you for your time and effort in this session
• Hopefully you have a better sense of the Big Mac index, purchasing power parity and foreign exchange rates from today
• You can do this• Do good things daily• It is about progress over time• Contact me?• Bruce Damasio at Maryland Council on Economic
Education. ( Towson U ) [email protected]• Take care and thanks again for coming this morning!