The Big Mac index uses the PPP (Purchasing-Power Parity) theory, that exchange rates should adjust to equal the price of a basket of goods in different countries in the long run. In this special index used by The Economist magazine the basket of goods consists of the world renowned Big Mac burger of McDonald's. In order to produce the index the price of the Big Mac is compared to its price in America of $4.20 (average price). This has proven to be quite useful in determining how over or undervalued a currency is.
Currently , Switzerland has the most overvalued currency among those in the index with the Swiss Franc 62% higher than the dollar. However on the flip side the Indian Rupee is 60% below that of the dollar, in terms of the Big Mac. The questions is how do you compare the price of a Big Mac in a country that does not sell the Big Mac, such as India? The answer is the next best thing, for example in India , at a price of $1.62 the Maharaja Mac is India's answer to the Big Mac, although it is made of chicken, it is the cheapest burger in the Big Mac index . So it is not necessarily a Big Mac index however the concept is not only intelligent but very effective and has provided a clear picture of what currencies are overcooked in comparison to the dollar and which are slightly undercooked.
Not only does it show how worldwide currencies are currently doing but they also show the progress over time. Take the euro which hit a 16-month low against the dollar and is now valued at $1.30. However back in June 2011 when the last Big Mac Index the euro was 21% overvalued in comparison with the dollar , but now it is only 6% overvalued than the dollar.
The amazing thing about this is that such a simple good like a Big Mac has been turned into an effective measure of the value of different currencies in terms of the dollar. Next time you have a Big Mac just think about how much it will cost somewhere else in the world or even better enjoy a Maharaja Mac!
2 comments:
A well written post, very interesting! I always did think Europe's McDonalds were expensive and over priced! Quite surprised of Brazil's and Argentina's Big mac price, they must be targeting the well off. However I wouldn't say it's a fair comparison of the Maharaja and the Big Mac as one is made of chicken and the other of beef, one is more expensive than the other.
P.S. For anyone who wants to know Maharaja means "Great King." ;D
thanks Ryan. I agree with the chicken and beef thing but it is terms of popularity that they chose it
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