The Big Mac Index
Coined "Burgernomics". the Big Mac Index has become a global standard of determining purchasing power between two currencies by comparing the cost of the McDonald's burger in any two countries.
- The average price of a Big Mac is compared to demonstrate the value of a currency. For example, a Big Mac costs $4.07 in the U.S. compared to $2.27 in China. The burger is 44% cheaper In China, which suggests the
yuan is 44% undervalued against the dollar.
- How it is created? The Big Mac Index was introduced in The Economist in September 1986 as an illustration demonstrating exchange-rate theory.
- What is it? An informal way of measuring the Purchasing Power Parity (PPP) between two currencies - a comparison of currency value.
- Variants. In 2004, the Tall Latte index featured a Starbucks Coffee. In 2007, the iPod Index was considered more consistent, but criticized for ignoring shipping costs. IKEA also made an appearance in 2009 with
Bloomberg's Billy Index.
#2 How it is calculated
- 1. Divide the price of a Big Mac in one country (in it» local currency) by the price of a Big Mac in another country (in its local currency). In July 2011. A Big Mac in Brazil was the equivalent of $6.16 US dollars.
- 2. Compare this value with the current exchange rate. The implied PPP of the Brazilian Real was $2.34. The actual exchange was $1.54. (US$4.07)
- 3. A lower value indicates the first currency has been undervalued: a higher value indicates the first currency is overvalued. The Brazilian Real was overvalued by 149%. (R$9.50)
- 4. The Big Mac Index suggests most emerging market currencies are significantly undervalued.
#3 The index
- The PPP of the hamburger standard signals where exchange rates should move in the long run. The raw index offers a predicted value compared to ihe adjusted GDP based on average income.
- Index adjusted for GDP per person: 1) Peru - +63%; 2) Argentina - +101%; 3) Hong Kong - -43%; 4) Brazil - +149%; 5) Euro Area - +36%; 6) Canada - +24%; 7) China - +3%.
- Big Mac prices vs. GDP per person. Burgernomics July 2011 (keys: country, line of best fit (the current fair value of a currency): 1) Brazil ~ $6.1 (GDP per person ~ $18.000); 2) Euro Area ~ $5.8 (GDP per person ~
$42.000); 3) US ~ $3.6 (GDP per person ~ $50.000); 4) Japan ~ $3.5 (GDP per person ~ $47.000); 5) UK ~ $3.4 (GDP per person ~ $40.000); 6) China ~ $2.3 (GDP per person ~ $8.000).
- Average prices should be lower in poor countries than in rich ones because labor costs are lower.
#4 An alternative Big Mac index
- In 2009, UBS Wealth Management Research expanded the idea of the Big Mac Index to demonstrate the amount of time an average worker in a given country must work to buy a Big Mac. Average global working time
to buy a Big Mac - 38 minutes: 1) Tokyo - 10 min; 2) LA - 11 min; 3) New York City - 13 min; 4) Toronto - 14 min; 5) Chicago - 12 min; 6) Sydney - 14 min; 7) Zurich - 15 min; 8) Paris - 20 min; 9) Shanghai - 30 min;
10) Budapest - 59 min; 11) Cairo - 82 min; 12) Mexico City - 129 min; 13) Jakarta - 136 min; 14) Nairobi - 158 min.
- Most expensive burgers: 1) Norway - $7.20 (45Kr); 2) Dweden - $6.56 (48Kr); 3) Switzerland - $6.19 (6.50CHF); 4) Brazil - $5.77 (9.50R$); 5) Denmark - $4.90 (28.5Kr). (July 210) (not considering the fact that
the buyer's equivalent purchasing power is different).
- Least expensive burgers: 1) Croatia ($3.00); 2) Malaysia ($2.27); 3) China ($1.95); 4) Hong Kong ($1.90); 5) Ukraine ($1.84).
(July 210) (not considering the fact that the buyer's equivalent purchasing power is different).
#5 Issues & limitations
- Demand, local taxes, tourism, local competition, production and delivery costs, advertising, rent and wages vary between countries and are not always wholly representative of a country's economy.
- Big Mac varies in size, nutrition and even content from country to country. Varying markets mean that to maximize profit margins, relative prices are not just reflective of currency values, but also sale volumes. A Big Mac
costs more in New York City than in Adel, Georgia.
#6 Currency values
- The 5 overvalued and 5 most undervalued currencies - Big Mac Index 2011. 5 most overvalued currencies: 1) Brazil (+149%); 2) Colombia (+108%); 3) Argentina (+101%); 4) Sweden (+85%); 5) Switzerland
- The 5 overvalued and 5 most undervalued currencies - Big Mac Index 2011. 5 most under currencies: 1) Hong Kong (-43%); 2) India (-8%); 3) Taiwan (-7%); 4) Singapore (-6%); 5) Saudi Arabia (-3%).
MBA | Sources: en.wikipedia.org; economist.com; bigmacindex.org; dlaasfed.org | Information provided by: http://www.onlinemba.com.