Economists have established an informal method for gauging the purchasing power parity (PPP) between two foreign currencies termed as the Big Mac Index. The name taken by the index, Big Mac, was derived from the hamburger sold at the McDonald’s restaurants that are almost in over 120 countries. Pan Woodall an economist is the one who introduced the Big Mac Index in September 1986. Economists have argued that the Big Mac index has proved to be a more accurate financial earmark to have ever been based on food items.
A fair bench mark value is the exchange rate that ensures burgers in other parts of the world cost the same as those in the US (Wankel, 2009). A recent research showed Asia to be the cheapest place for one to enjoy a burger. How to arbitrage among burgers in the USA and Britain To arbitrage among burgers in the US and Britain the sellers should consider some of the following factors; Transport costs, costs in transport are very important as far as the transportation of inputs and outputs is concerned. The costs of access of the premises by customers are also a must consideration in setting up a business.
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The location that seems to be cheaper and brings high returns to the investor should then have the upper hand. The other factor to consider is trade restrictions put in place by different governments. While differences in transport costs can leave room for arbitrageurs to make good profits, trade restrictions completely wipes off such opportunities. In relation to tariffs, taxes in countries hinder business opportunities in different governments. To arbitrage one should consider a country that does not have high tax rates. Effects of many people arbitraging
The issue of arbitrage serves a very important function in listed option markets. Arbitrage provides an option in secondary markets where he can not be able to exit if need does not occur. Most markets are dictated by the transportation costs, their physical sizes, and physical features that act as barriers. Yet with all these barriers, people are still willing to arbitrage. When many people are arbitraging, the market created leads to the attraction of demand (Wankel, 2009). Without them, the net buyers attracted will reduce and be short-lived.
With the presence of heavy arbitrageurs in a place, price is affected. This is due to the essence of high supply that results to a negative effect on the prices. This results to an inordinate in stock selling. Reasons for price differentials in Big Macs The differences in prices in Big Macs may be due to various reasons. Some of them include; culture of the people where the restaurants are located, tastes and preferences, price of other related products and . the culture dictates what people should and should not consume.
If prices of other products are lower then the demand of Big Mac will be affected negatively. This greatly dictates the price of Big Mac. The cost of producing Big Mac in different place also dictates the price. Taxes charged in countries of operations also have impacts on price. If taxes charged are high in one region, the prices shoot up as investors try to compensate for these high taxes by charging high taxes. The argument in paragraph two is valid as an increase in imports often affects prices in the importing country negatively.
The country spends a lot in terms of importing than it receives from exports. In the third paragraph, it is true that trade in third world countries is poorly organized due to this the economy is so poor. The countries often spend a lot in importing finished goods than it exports. Though the countries are rich in resources both raw and minerals, the countries can not manage them effectively. Instead foreign states manage them and most returns end up benefiting foreign countries than the mother countries. Reference: Wankel, C. (2009). Encyclopedia of Business in Today's World, Volume 1. New York: Sage.
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Analysis of Price Policy in Big Macs. (2016, Jul 15). Retrieved from https://phdessay.com/analysis-of-price-policy-in-big-macs/