McDonald’s Corporation essay

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McDonald’s corporation is the largest chain of hamburger fast food restaurant, catering for millions of people daily in 120 countries. It operates on a standard menu of items with varying prices in different countries.  As a protuberant example of the rapid globalization of the fast food industry, McDonald is often the target of criticism for it varying prices of its standard menu around the world (Pakko, 2003).  Several publications have analyzed the different prices of the standard hamburger and have resulted to articulate an economic principle of Purchasing Power Parity (PPP). According to the article, the underlying foundation of PPP explains this foundation as that which states that the price of a certain commodity should be equal in different countries after taking into accounts local exchange rates.   McDonald’s business practice uses the U.S dollar as its trading currency. As a result, there is wide disparity in pricing of the hamburger in different countries due to the prevailing exchange rate of the U.S dollar and local currency.   This range violates the principle of PPP. Another explicable cause for deviations from PPP is the local wage.  The local wage is a factor of domestic labor force.  The restaurants are built and maintained by the locals of a given country. The sandwiches are too made by the locals.  As a result, different costs are incurred this yields different local wage rate which in return dictates different pricing of the hamburgers.  Notwithstanding that the local level of earning affects the demand for McDonald’s products.   Lastly, factors such as transportation costs, trade barriers, taxes and even differences in tastes contribute to the wide disparity of the hamburger pricing in different countries.

Critique of the Purchasing Power Parity Methodology

In the economic world, Purchasing Power Parity (PPP) asks how much money would be needed to purchase the same goods in two countries, and uses that to calculate an implicit foreign exchange rate. This principle gives budding “consumers” of economics a taste of the principle of international currency valuation. As a prominent example of the rapid globalization of the fast food industry, economists have often citied McDonald as a point of reference for the PPP principle.  Catering to millions of people daily in 120 countries, McDonald’s corporation is the largest chain of hamburger fast food restaurant operating on a standard menu of items with varying prices in different countries. However, the PPP principle is biased by expecting same pricing for hamburgers across the 120 countries.  This is because deviations from parity imply differences in purchasing power (Balassa, 1964).  If purchasing power parity held exactly, then the real exchange rate would always equal to one.  Nevertheless, in practice this is not so.  This is because for start McDonald’s business practice uses the U.S dollar as its trading currency. As a result, there is wide disparity in pricing of the hamburger in different countries due to the exchange rate of the U.S dollar and local currency.   Another cause for deviations from PPP is the local wage.  The local wage is a factor of domestic labor force.  The restaurants are built and maintained by the locals of a given country. The sandwiches are too made by the locals.  As a result, different costs are incurred and this yields different local wage rate which in return dictates different pricing of the hamburgers.  Notwithstanding that the local level of earning affects the demand for McDonald’s products.   Lastly, factors such as transportation costs, trade barriers, taxes and even differences in tastes contribute to the wide disparity of the hamburger pricing in different countries which in turn violates the principle of Purchasing Power Parity.

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