The Big Mac Index Explained: Economies told through hamburgers
Twice a year The Economist publishes the Big Mac index. It is a fun guide to the world’s currencies that attempts to adjust them all to an equitable level through the great equalizer known as the Big Mac. Being one of the few prepared food items that can be purchased nearly across the globe, it serves as a great bellweather: Is a country’s currency over-valued?
Even the Economist admits to this being a light-hearted and not entirely serious “index”, but it’s certainly caught on, having been the subject of numerous academic studies.
This video gives you a brief introduction to the index, and how, as well as why, the Big Mac Index is useful.
McDonald’s does not ONLY deal with currency trends. They also look at demand, and the respective country’s average wage to price out their burgers to maximize sales. Many times, they are ahead of the curve on judging economic situations, simply because they have their own data to deal with. Billions sold everyday…
The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in July 2013 was $4.56; in China it was only $2.61 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 43% at that time.
Here’s what it looks like using US dollars. The Index is interactive, so you can see how all the different base currencies are affected.