Download the Big Mac Index here

Burgernomics!
•
The Big Mac Index
NERC March 13, 2006
Judy Heine
Retired, Canton (MA) &
MA Council on Econ Ed
The Big Mac Index
or
“Burgernomics”
The Big Mac Index
or
“Burgernomics”
•Created by ‘The Economist’
in 1986
• Tracks 20 yrs of data
• Published Quarterly!
The Big Mac Index
* Big Mac has same recipe (ingredients) in
120 countries
* So, Big Mac SHOULD cost same in each country,
but it Doesn’t!!
The Big Mac Index
* Based on notion that a dollar should buy the same
amount in all countries
(Purchasing Power Parity or PPP)
* In the long run, exchange rates between two currencies
should move towards the rate that equals the price of
an identical basket of goods & services in each
country
Big Mac Index
• Purchasing Power Parity
(PPP) is a measure of the
relative purchasing power
of different currencies.
• PPP is measured by the
price of the same goods in
different countries,
compared to the product in
the ‘base currency’
• Big Mac Index compares
Big Mac prices in US
Dollars to price in other
nations
Big Mac Index
• Visual display created
quarterly by The
Economist
• Comparing, over time,
shows changes in
strength of currencies
Big Mac Index
• Currency values
fluctuate daily
• Measures one
currency in relation to
another
• Can compare price of
Big Mac in another
nation to that in USA!
Big Mac Index
Comparing a currency’s
actual exchange rate
with its PPP is one test
of whether the
currency is
undervalued or
overvalued.
Big Mac Index
Is other nation’s
currency:
* OVERVALUED?
Costs MORE to buy
Big Mac than in USA
or
* UNDERVALUED?
Costs LESS to buy
Big Mac than in USA
Making Your OWN Big Mac
Index
Formula: #1 Derive PPP
Foreign Price = PPP
US Price
Making Your OWN Big Mac
Index
Formula: #2
To determine if Currency is
overvalued or undervalued
against US Dollar
(PPP-Exchange Rate) X 100
Exchange Rate
What can be learned from
Big Mac Index?
• Emerging nations have
weak currencies
• Expensive for them to
buy from nations with
strong currencies
• Expensive for US to
buy from nations with
overvalued currency
What can be learned from Big
Mac Index?
Implications for Foreign
Trade:
Can US sell to other
nations easily if their
currencies are:
Undervalued?
Overvalued?
The Big Mac Index (or “Burgernomics”)
seeks to make Exchange Rate theory
more “Digestable.”
Big Mac Index
• May be ‘hard to swallow’
for some
• PPP holds true in longrun even if:
--- local prices distorted by
trade
--- barriers on beef
--- sales taxes or difference
in property rents!
Big Mac Index
• Doesn’t compare real purchasing power of
currencies around the world!
• USB has created another index that aims to
measure well-being by estimating # minutes
workers in various countries must toil to
buy a Big Mac
– EX: Kenya = 3 hours
USA = 10 minutes!
Differences reflect variations in productivity and
disparity in cost of ingredients
Burgernomics!
•