Burgernomics: An Instructional Case on the Law of One Price

Abstract

Jane just moved back to her hometown in Western New York to start a job at a bank. One evening, she meets her old friend Sally, who traveled the world for the past five months and tells Jane about her experiences with the different price levels in all the countries that she visited. Jane, being a recent graduate in international economics and finance, understands the underlying dynamics that are due to exchange rate theory and sheds light on the price discrepancies prevailing between the different currencies.

This case focuses on the construction of the Big Mac index and on conveying the theoretical basis of the index (Purchasing Power Parity and the Law of One Price) to undergraduate students in business and economics. It is appropriate for use in undergraduate courses such as international finance, financial markets or international economics. It could also be used in (international) marketing courses to show the importance of product pricing.