Question

The Big Mac Index shows that the price of the Big Mac in China converted from the local currency, yuan, to be $2.18, whereas its price in the United States is $3.73. This shows that:

A) the Big Mac is more popular in China than in the United States.
B) the Big Mac is less expensive in the United States than in China.
C) the Chinese yuan is overvalued when compared to US $.
D) the Chinese yuan is undervalued against the US $.
E) beef is less expensive in China than in the United States.

Answer 1

The Big Mac Index indicates that the Chinese yuan is undervalued against the US dollar, reflecting differences in purchasing power parity rather than the popularity of the product or beef prices specifically. GDP per capita, a key indicator of individual prosperity, is much lower in China compared to the United States.

Step-by-step explanation:

The Big Mac Index suggests that if the price of a Big Mac in China converted from the local currency (yuan) is $2.18, while its price in the United States is $3.73, this implies that the Chinese yuan is undervalued against the US dollar. This does not necessarily indicate that the Big Mac is more popular in China nor does it reflect the cost of beef specifically in China compared to the United States. Instead, the index is a light-hearted way to measure purchasing power parity (PPP) and compare currency values. The price difference signifies how much currency is required in each country to buy the same product, in this case, a Big Mac.

GDP and GDP per capita are important economic indicators that provide better context for understanding the Big Mac Index. Although China's GDP is the second-largest, their GDP per capita is significantly lower than that of the United States, which means the average Chinese person is relatively poorer. Increasing the , which is a more relevant measure of individual prosperity and standard of living, has greater implications for the economic well-being of the citizens than just the GDP alone.