Much harder than on the test! According to The Economist’s Hamburger Standard, on average, a Big Mac costs Won 3,700 in South Korea, which
at current exchange rates is USD $3.50. Yet a Big Mac, on average costs $4.07, in the United States. True or False: The theory of Purchasing Price Parity suggests that the Won should strengthen.
True. In this fun example, more people would want to purchase a Big Mac in South Korea, exchanging their USD for Won—so selling USD and buying Won. To understand through example: On can divide the Won price by the US Big mac price and get what “should” be the exchange rate at Purchasing Price Parity: Won 3,700/$4.07 = Won 909.1 / 1 USD – which means one gets fewer Won per $1 than at the current FX rate … or it takes fewer Won to purchase 1 USD than at the current exchange rate. Of course, there are externalities that are affecting the differences in prices.