The focus is mainly on the Purchasing power parity of McDonald’s, which could help in identifying the relationship between exchange rates and prices of the product. The report directly provides relevant explanation regarding Purchasing power parity which could be helpful in understanding the benefits reaped by McDonalds. Moreover, there are relevant focus on both problems and factors that is affecting Purchasing power parity. Relevant analysis and discussion is conducted regarding the price big Mac against US dollars in different countries. Moreover, the evaluation of overvalued and undervalued of the currency against US dollar is also depicted, which could mainly help in understanding the relevant income generated from Big Mac. The evaluation of currency strength could eventually help in identifying the impact of currency conversion on the overall revenue of the company. They could you eventually allow the company to identify the changes in that needs to be conducted for increasing profitability from international business. Lastly, relevant identification of Purchasing power parity on the BIG MAC prices can be identified, which could directly help in identifying the relevant revenue generated by the company.
Purchasing power parity is mainly identified to be an equilibrium which is identified between purchasing price that is provided by citizens in US and other countries. You foreign exchange parity models directly help and estimating the equilibrium spot exchange rates, which could help companies in reducing the price gap. The help of parity models companies are mainly able to test the correctness of the spot rate for increasing the significance of its trading strategy. This could eventually help in reducing the currency overvaluation and undervaluation by adopting adequate long or short strategy. Arize, Malindretos and Ghosh (2015) stated that Multinational companies mainly used purchasing power parity for reducing the gap between prices of the products between different countries and maintain the required revenue from their investment. The relevant factors affecting purchasing power parity and its limitations are discussed below.
Inflation is mainly considered one of the major problems for purchasing power, as it directly affects the relevant prices of a product in one country and another. Hence, the purchasing power parity could not be satisfied as the relevant prices in that country is higher, which will increase the valuation and reduce the parity between currency exchange. Moreover, the deflation of the prices could also negatively impact the parity, as prices of the product will not be adequately valued against home country prices (Bahmani-Oskooee, Chang and Wu 2015).
The second factor that affect Purchasing power parity is the wages and employment section, which directly involves cost factor of a particular product. The relevant increment in wage rate and reduce unemployment sector could eventually increase the cost of production and relatively reduce purchasing power parity. Hence, the understating of employment could eventually allow organization to increase the relevant revenue from the country. The increased income could also become a relevant factor for purchasing power parity.
The major fluctuations in purchasing power parity could mainly be identified from currency consideration, as changes in currency could eventually affect price difference in prices of home country and foreign country. However, the impact could not be seen in domestic country instead any imports could eventually result in higher prices and affect purchasing power parity. Hence, it could be assumed you that the businesses could pass the higher cost on consumers, changing the overall domestic country purchasing power in comparison to the home country purchasing power (Bell, Brooks and Moore 2017).
Availability of credit is also a major factor affecting purchasing power parity, as increment in lending process could eventually help in generating higher purchasing power among consumers. Therefore, with the rising credit line companies and consumer could increase their spending power and help in reducing the gap between purchasing power parity. Hence, the credit line directly affects the purchasing power parity of organizations.
The main limitations of purchasing power parity is Transpiration cost, Demand and Taxes, which directly reducing the impact of PPP. The relevant increment in transportation cost is one of the major factor that affects expenses of the domestic company. In addition, the demand from consumers could also help in identifying the purchasing structure that they are willing to pay for the product. Lastly, the impact of taxes also reduces usefulness of the purchasing power parity (Bhatti and Moosa 2016).
|
Big MAC prices |
|||||
|
Country |
In local currency |
in us Dollars |
Implied PPP Of the dollar |
Actual dollar Exchanged rates as on 01-07-2017 |
Undervaluation/overvaluation against the dollar In % |
|
United state |
5.3 |
5.3 |
1 |
1 |
|
|
Hang Kong |
19.2 |
2.46 |
3.62 |
7.81 |
Undervalued by 53.3% |
|
China |
19.8 |
2.92 |
3.74 |
6.79 |
Undervalued by 45.0% |
|
Saudi Aribia |
12 |
3.20 |
2.26 |
3.75 |
Undervalued by 39% |
|
Colombia (peso) |
9.9 |
3.24 |
1.87 |
3.06 |
Undervalued by 38.8% |
|
South Korea(won) |
4.4 |
3.84 |
830.19 |
1.145 |
Undervalued by 27.5% |
|
Sweden (Skr) |
48.97 |
5.82 |
9.24 |
8.42 |
Overvalued by 9.8% |
|
Norway(kroner) |
49 |
5.91 |
9.25 |
8.29 |
Overvalued by 11.6% |
|
Sri Lanka(Rupee) |
580 |
3.77 |
109.43 |
153.73 |
Undervalued by 28.8% |
|
Mexico |
49 |
2.75 |
9.25 |
17.79 |
Undervalued by 48.0% |
From the valuation of above table relevant Purchasing power parity could be identified, which might directly affect revenue generated from Big Mac. There is relevant difference between the actual currency price and converted currency price of Big Mac in different countries. The prices mainly indicate the problems of purchasing power parity, which is directly affecting the revenue generation capacity of the organization. There is relevant differences in local currency against US dollars, which states over and under evaluation of the dollar against the converted to currency price. The Prices in Hong Kong is relatively lower as compared in US Dollar, as in conversion the prices are at $2.46, while the actual US price is mainly at $5.30. Hence, the prices in Hong Kong is significantly lower. This is mainly due to the reduced demand in the country for Big Mac (Gelb and Diofasi 2015).
Furthermore, the overall prices in China for Big Mac is relatively lower, as it might hamper the relevant pricing of the organization. This is mainly due to the low costs and expenses incurred by the company and the relevant prices, which Chinese citizens are willing to pay. Moreover, the prices in Saudi Arabia is also at $2.26, which is significantly lowers that than the actual prices in US, which is due to the competition level currently present in the Saudi Arabia. The overall prices of South Korea and Colombia is also significantly lower than the actual price in US due to the intense competition and changes in society life style. The price is also different due to the food cost incurred in the foreign country. However, the prices in Sweden and Norway is significantly higher in comparison to US prices, due to the reduction in availability of materials.
This mainly increases the process and significantly increases the revenue generated from these countries. Lastly, both Sri Lanka and Mexico has lower prices of Big Mac due to the vast availability of materials and reduced demand due to preference of consumers. Hence the valuation of big Mac could be identified in all the 10 countries in comparison with us, where Difference in prices could be identified due to availability of demand, materials, and consumer preference (Hassan, Hoque and Koku 2015).
|
Country Big MAC prices |
Undervaluation/overvaluation against the dollar In % |
|
Hang Kong |
Undervalued by 53.3% |
|
China |
Undervalued by 45.0% |
|
Saudi Aribia |
Undervalued by 39% |
|
Colombia (peso) |
Undervalued by 38.8% |
|
South Korea(won) |
Undervalued by 27.5% |
|
Sweden (Skr) |
Overvalued by 9.8% |
|
Norway(kroner) |
Overvalued by 11.6% |
|
Sri Lanka(Rupee) |
Undervalued by 28.8% |
|
Mexico |
Undervalued by 48.0% |
From the overall evaluation of the above table relevant and evaluation and valuation of the Currency could be identified. There is relevant difference between the actual prices in US and the prices in foreign countries. The undervaluation of Hong Kong is relatively at 53.5% which is mainly due to the reduced prices that is charged for Big Mac in the country. No significant changes is mainly due to the reduced purchasing power parity that is conducted within the country. In the same case scenario Chinese valuation of big Mac is also undervalued by 45%, as the prices of the product is significantly lower, which divides the actual decline in the valuation (He, Chou and Chang 2014).
Both Saudi Arabia and Colombia also has there big Mac undervalued due to the pricing structure used by the company in the specific countries. These pricing strategy mainly allow the organization of float in the competitive market where prices are identified from demand provided by the customers. Both the countries have relevant high chain restaurants, which distributes the demand and relevant profits of the organization. The other undervalued country is South Korea, which is mainly 27.5%. This changes in the Valuation of the prices is mainly due to the cultural impact that is enjoyed by South Korea. The country is mainly focused in rice consumption, while Big Mac is less in demand within the country.
However, the valuation in Sweden and Norway is mainly due to the increased taxes, reduced availability of materials and demand of the product among customers. These factors mainly increase relevant prices of big back in the country. Sweden has an overvaluation of 9.8%, while Norway has an overvaluation of 9.8%. This increased prices as directly influenced the pricing structure of Big Mac in the specified countries and allowed your organization to generate higher revenue (McKinnon and Ohno 2016).
Lastly, the undervaluation of Sri Lanka and Mexico is also at 28.8% and 48%, which is mainly due to the increased competition level faced by the organization and specific country. Furthermore, Big Mac in Mexico is relatively identified to be at 48% in evaluation, which directly depicts the reduced prices increased by the company. Hence, price of Big Mac is mainly higher in Norway and Sweden everywhere as the prices are significantly lower reducing the company to generate the required level of profitability from operations in comparison to its home country.
Conclusion:
The valuation of the assignment that it helps in identifying the prices of Big Mac in different countries, due to the factors of purchasing price parity. The prices of product is significantly difference as compared to the US prices of big Mac which is due to the factors such as demand, expenses and preferences of consumers. Hence, from the valuation it could be identified that Hong Kong has the least and evaluation of big Mac up to 53.5%, whereas Norway has the highest overvaluation of big Mac products. This directly indicates the difference in demand, Consumer preference and materials will available in the country. Hong Kong is considered to be the home of businesses, where competition level for the organization is relatively higher, which derives the rise in prices lower. Therefore, the purchase power parity for Big Mac product is relatively not being achieved and is not being obtained by the company.
References
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Bahmani-Oskooee, M., Chang, T. and Wu, T.P., 2015. Purchasing power parity in transition countries: panel stationary test with smooth and sharp breaks. International Journal of Financial Studies, 3(2), pp.153-161.
Bell, A.R., Brooks, C. and Moore, T.K., 2017. Did purchasing power parity hold in medieval Europe?. The Manchester School, 85(6), pp.682-709.
Bhatti, R.H. and Moosa, I.A., 2016. International parity conditions: Theory, econometric testing and empirical evidence. Springer.
Gelb, A. and Diofasi, A., 2015. What Determines Purchasing Power Parity Exchange Rates?.
Gopinath, G., Helpman, E. and Rogoff, K. eds., 2014. Handbook of international economics (Vol. 4). Elsevier.
Hassan, K., Hoque, A. and Koku, P.S., 2015. Purchasing Power Parity in the SAARC Region: Evidence from Unit Root Test with Cross-Sectional Dependence. The Journal of Developing Areas, 49(5), pp.129-137.
He, H., Chou, M.C. and Chang, T., 2014. Purchasing power parity for 15 Latin American countries: panel SURKSS test with a Fourier function. Economic Modelling, 36, pp.37-43.
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McKinnon, R.I. and Ohno, K., 2016. 7 Purchasing power parity as a monetary. The Future of the International Monetary System: Change, Coordination of Instability?: Change, Coordination of Instability?, p.42.
Melvin, M. and Norrbin, S., 2017. International money and finance. Academic Press.
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Özkan, F., 2013. Comparing the forecasting performance of neural network and purchasing power parity: The case of Turkey. Economic Modelling, 31, pp.752-758.
Pelagatti, M. and Colombo, E., 2015. On the empirical failure of purchasing power parity tests. Journal of Applied Econometrics, 30(6), pp.904-923.
Reeves, A., Gourtsoyannis, Y., Basu, S., McCoy, D., McKee, M. and Stuckler, D., 2015. Financing universal health coverage—effects of alternative tax structures on public health systems: cross-national modelling in 89 low-income and middle-income countries. The Lancet, 386(9990), pp.274-280.
Simpson, M.W. and Grossmann, A., 2014. An examination of the forward prediction error of US dollar exchange rates and how they are related to bid-ask spreads, purchasing power parity disequilibria, and forward premium asymmetry. The North American Journal of Economics and Finance, 28, pp.221-238.
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