1 markInternational EconomicsBalance of payments and exchange ratesPurchasing power parityModerateabout 2 min

IIT JAM 2022 Question 50: Balance of payments and exchange rates

Big Mac prices (local currency) and market exchange rates (local currency per USD) in January 2019: US 5.58, 1.00; Norway 50.00, 8.53; Japan 390.00, 108.44; Mexico 49.00, 17.31; China 20.90, 6.85; Russia 110.17, 66.69; India 178.00, 69.69. The cheapest price (in USD) of a Big Mac is _______ (round off to 2 decimal places).

Answer and worked solution

Answer: 1.63 to 1.67

Divide each local Big Mac price by its local-currency-per-USD rate to get the USD price.

The results are roughly US $5.58$ , Norway $5.86$ , Japan $3.60$ , Mexico $2.83$ , China $3.05$ , Russia $1.65$ , India $2.55$ . The cheapest is Russia at about $\dfrac{110.17}{66.69} = 1.65$ USD, within the accepted range.

Balance of payments and exchange rates has come up 120 times in 7 exams since 2007.

What this question tests

This question is on Purchasing power parity, part of Balance of payments and exchange rates in International Economics.

Whether exchange rates adjust to equalise price levels.

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