The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In July 2015, The Economist reported that the average price of a Big Mac in the United States was $4.79
In Switzerland, the average price of a Big Mac at that time was 6.50 Swiss francs. If the exchange rate between the dollar and the Swiss franc was 0.93 Swiss francs per dollar, explain how it would be profitable to buy Big Macs in the United States instead of in Switzerland.
If a Big Mac costs 6.50 Swiss francs in Switzerland, a person in Switzerland could trade in that 6.50 Swiss francs for $6.99 (6.50 Swiss francs / 0.93 Swiss francs per dollar) and buy 6.99 / 4.79 = 1.46 Big Macs in the United States. Those 1.46 Big Macs could then be sold in Switzerland for 6.50 Swiss francs each, generating 1.46 Big Macs × 6.50 Swiss francs per Big Mac = 9.49 Swiss francs. This implies that a person in Switzerland could profit by trading in Swiss francs for dollars, buying Big Macs in the United States, and reselling those Big Macs in Switzerland.
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