BMW Group is an international automaker, with both German and American sales. The BMW X3 M is its automobile brand. It sells at different prices on both the American and German market. Although the assumption is that one price will apply, market differences make it difficult to know if this is true. The index could not be exact as the market prices of commodities can vary depending on the respective needs and uses. As of July 2020, the Big Mac index shows that the Euro was 16% below the dollar. The alternative product selected is the BMW X3 M, which is priced at $69,900 in the United States and €59,415 in Germany. Using the Big Mac Index, the suggested value of $69,900 in Germany is €51,630. Both countries will buy 13238 Big Macs for $69900, so the purchasing power of both currencies is equal. In terms of actual value, the market exchange rate for $69,900 is €57,096. There is no purchasing power parity when $69,900 buys 13,238.64 Big Macs from the United States and only 14,640.05 in Germany. This implies that if a BMW X3 M costs $69,900 in the United States, it must cost €51,630 in Europe to be viewed as having a comparable value. To get the suggested value of €51,630, $69,900 is added, although the actual market value of €51,630 is $63,208. This indicates that $69,900 in Germany is equivalent to $77,299 in the United States (BMW in the U.S. URL: https://www.bmwusa.com/vehicles/m-models/x3-m/pricing-features.html). BMW in Germany’s website address is https://www.bmw.de/de/neufahrzeuge/m/x3-m/2019/bmw-x3m-inform.html.
According to the GDP-adjusted value, a BMW X3 M costs 15% less in the euro area (€51,630) than in the United States ($69,900) at the current exchange rate. The BMW X3 M will cost approximately 17% less depending on how much per capita GDP has changed. Accordingly, the GDP-adjusted price is $18,270. Schmidt (2016) states that trade barriers have an effect on price flexibility, which in turn reduces sellers’ and buyers’ abilities to manipulate prices. This is the law of one pricing. Arbitrage options can be used to protect economic relations from lower prices if prices differ across markets.
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