With close to fifty billions burgers sold and available in nearly every region in the world, it’s no surprise that The Economist uses the beloved Big Mac as a relatable figure of global exchange rates.
What is the Big Mac Index?
“Burgernomics” in the form of a Big Mac Index is a simple and direct means of calculating a global comparison of purchasing power parity. The index compares the strength of different currencies by looking at the prices of a Big Mac in different countries around the world, translated from original currency into the US dollar. We can use this to compare the strengths of different national currencies, assuming the costs of production to be similar in each country.
The Big Mac Index is an important indicator of currency values in different nations. In general, we can see whether currencies are under or overvalued.
In theory, prices will eventually converge to a similar number for an identical basket of goods and services in a country. In Europe, for example, the currency exchange rate is much higher, as evidenced in Norway where the average cost of the Big Mac is $7.20 compared to the American standard of $3.73. Conversely in any given McDonald’s (MCD) in Argentina you can get your hands on a burger for $1.78.
How Valuable is the Big Mac Index?
But like the fries they come with, the Big Mac Index should be taken with a grain of salt. While the Big Mac Index gives us a general idea of purchasing power, enlightenment is not found through the golden arches.
There lies problems within the index for not holding regional adjustments for the prices in assembling two all beef patties, special sauce, lettuce, cheese, pickles, and onions on a sesame seed bun. Asia — where the Big Mac is cheapest — can hold prices much lower.
However to produce more accurate results of purchasing power, UBS Wealth Management created an expanded index by figuring out the average income of workers and then finding out how long it takes to earn enough for a Big Mac. So while the Big Mac Index is fun, it still has flaws, and fails to produce anything more than a quantitative perspective on prices fast food junkies pay to eat.
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