top of page
  • Writer's pictureRaj Sukkersudha, Founder of Denver Capital

The Big Mac Index: A Simple Way of Comparing Global Purchasing Power.



The Big Mac index is a unique way of measuring the purchasing power parity (PPP) between different countries. Developed by The Economist in 1986, it compares the price of a Big Mac burger from McDonald’s in different countries to assess the relative value of currencies.

The Big Mac index works on the principle of PPP, which suggests that the exchange rates between two currencies should adjust to the difference in the cost of living between the two countries. In other words, if a basket of goods costs more in one country than in another, then the currency of the former country should be relatively weaker than that of the latter. Therefore, by comparing the price of a standardised product like the Big Mac, which is sold in more than 100 countries, one can obtain a rough estimate of the PPP exchange rate between two countries.

The Big Mac index has gained popularity over the years as a fun and accessible way to understand the complexities of international economics. It is often used in classrooms as a teaching tool to explain concepts like exchange rates, inflation, and PPP. Moreover, it has also become a popular topic for news outlets and social media, particularly during global economic crises or political events that affect exchange rates.

One of the advantages of the Big Mac index is that it is based on a standardised product, which ensures consistency in the comparison between different countries. The Big Mac is chosen for several reasons, including its widespread availability and consistency in ingredients, size, and quality. Moreover, the Big Mac is a popular food item that is consumed worldwide, making it an ideal candidate for this purpose.

The Big Mac index has its limitations, however. For one, it does not take into account the differences in local tastes and preferences, which can significantly affect the price of the burger in different countries. Moreover, the index does not factor in non-tradeable goods and services, such as housing, healthcare, and education, which can have a significant impact on the cost of living in a particular country.

Despite these limitations, the Big Mac index remains a useful tool for gaining insight into international economics. For instance, the index can be used to identify undervalued or overvalued currencies. Countries with currencies that are undervalued relative to the US dollar, for example, might be attractive to investors because their goods and services would be cheaper for foreigners to purchase. Conversely, countries with overvalued currencies might be less attractive to investors because their goods and services would be relatively more expensive.

Another application of the Big Mac index is in predicting future exchange rates. By comparing the price of a Big Mac in two countries, one can predict the future exchange rate between their respective currencies. If the Big Mac is more expensive in country A than in country B, for example, then it is likely that the currency of country A will depreciate relative to that of country B in the future.

The Big Mac index also sheds light on the economic and social conditions of different countries. For instance, the index can reveal the differences in wage levels and labour productivity between countries. Countries with higher wages and labour productivity are likely to have higher prices for the Big Mac because the cost of producing the burger is higher in those countries.

Overall, the Big Mac index is a unique and useful way of measuring the PPP between different countries. While it has its limitations, the index has become a popular tool for understanding international economics and predicting future exchange rates. As the world becomes increasingly interconnected, the Big Mac index will likely continue to be a valuable tool for policymakers, investors, and academics alike.


 

IMPORTANT: This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualised advice from a qualified professional.



3 views

Comments


Commenting has been turned off.
bottom of page