Purchasing Power Parity
Big Mac Index BasicsPublished April 7, 2010 at 12:42 pm 1 CommentPurchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. The idea originated with the School of Salamanca in the 16th century [1] and was developed in its modern form by Gustav Cassel in 1918.[2] The concept is founded on the law of one price; the idea that in absence of transaction costs, identical goods will have the same price in different markets.
[...] 11.5 Pesos in Argentina and the same Big Mac costs $3.57 in the United States, then according to Purchasing Power Parity (and using the Big Mac as a typical basket of goods) 11.5 Pesos should equal $3.57. If 11.5 [...]