Last Updated on 23 July, 2024 by Abrahamtolle
Big Mac Index Comparison
We made a video of the BIG Mac Index which shows the comparison between the currencies.
What is the Big Mac Index?
The index compares the relative price of a Big Mac hamburger sold at McDonald’s restaurants in different countries, using the price of a Big Mac as the benchmark.
What does the Big Mac Index tell us?
The Big Mac Index has become a global standard for price comparison and is used to indicate the difference in the cost of a Big Mac in different countries, thereby providing insights into whether a currency is over- or undervalued against another based on the purchasing power.
What is the Big Mac Index based on? What is the logic?
The Big Mac Index is a tool devised by economists to examine whether the currencies of various countries offer roughly equal levels of basic purchasing power.
It is based on the theory of purchasing power parity, which states that exchange rates over time should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries.
The purchasing power parity theory (PPP)
Purchasing power parity (PPP) is a measure of the relative value of currencies in different countries.
It is the rate of currency conversion that equalizes the purchasing power of different currencies by eliminating the differences in price levels between countries.
PPP is calculated by comparing the prices of a basket of goods and services in different countries. The basket of goods and services priced is a sample of all those that are part of final expenditures final consumption of households and government, fixed capital formation, and net exports.
Forex is extremely difficult to forecast, but the purchasing power parity has historically help up pretty well over long time frames of at least one year, but preferably longer.
Is the Big Max Index correct?
No, it’s only an indication
Despite its widespread use, the index has limitations, such as its inability to analyze the PPP between the U.S. dollar and countries without a McDonald’s presence.
Who invented the Big Mac Index?
It was The Economist, the British weekly newspaper, that first started using it, at least publicly, in 1986, as an informal way of measuring the purchasing power parity between two currencies.
The Economist publish it annually, is available for 54 countries.
The Big Mac Index is a tool devised by economists to examine whether the currencies of various countries offer roughly equal levels of basic purchasing power.
The index compares the relative price of a Big Mac hamburger sold at McDonald’s restaurants in different countries, using the price of a Big Mac as the benchmark.
It is based on the theory of purchasing power parity, which states that exchange rates over time should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries.