Big Mac Index: Ever wondered how much an item you consume in India would cost in other countries? You’ve probably noticed that prices for the same things can vary between countries.
Well, there’s this fun yet insightful indicator of currency strength called the “Big Mac Index”, and yes, it’s all about burgers!
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what exactly is the Big Mac Index?
Basically, the price of a Big Mac can tell us a lot about the economy’s condition and how well it is doing.
The Big Mac Index is a price index introduced by ‘The Economist’ in 1986 by Pam Woodall. It got its name from the Big Mac burger sold at McDonald’s restaurants.
The idea is simple: since Big Mac hamburgers around the world use pretty much the same ingredients, their cost should be about the same everywhere in the world. By comparing Big Mac prices (at current exchange rates) in different countries, we can determine which currencies are under or overvalued and how much.
The index calculates the exchange rate that would make Big Mac prices equal across countries and is based on the theory of Purchasing Power Parity (PPP). It takes into account local factors like the cost of living, inflation, purchasing power, and other factors.
what is PPP?
Purchasing Power Parity (PPP) is an economic theory that says the price of a good in one country should be the same as its price in another country, once you consider the exchange rate between them.
use of the Big Mac Index?
The Big Mac Index helps figure out an implied exchange rate between two currencies and is calculated as:
Usually, the base country used is the United States.
When you use the local currency for each country, you get an exchange rate. You can then compare this exchange rate to the official exchange rate between the two currencies to see if the currency is undervalued or overvalued based on the PPP theory.
But why only Big Mac?
A McDonald’s Big Mac was chosen because of the prevalence of the fast food chain worldwide, and because it remains largely the same across all countries and it provides a reasonable measure of a real-world purchasing power.
McDonald’s has stores in over 190 countries, which means its Big Mac sandwich can provide a useful control variable. However, the disadvantage of this method is that it cannot be used to analyze the PPP between the U.S. dollar and countries which doesn’t have a McDonald’s restaurant, like Bolivia or Iceland.
Although the Big Mac Index was not intended to be a legitimate tool for exchange rate evaluation, it is now globally recognized and featured in many economic textbooks and academic studies.
What does it mean for India?
If the price of a Big Mac in India is much lower than in other countries, it suggests that the Rupee is undervalued, making it a good investment opportunity for foreign investors.
Conversely, if the price of a Big Mac in India is much higher than in other countries, it signals an overvalued Rupee, and investing may not be as favorable.
It’s worth noting that McDonald’s doesn’t sell the Big Mac in India due to local beef sensitivities. Instead, ‘The Economist’ uses the Maharaja Mac (which has chicken instead) for India’s entry to the Big Mac Index.
What are some other similar concepts?
Tall Latte Index – This index replaces the Big Mac with a cup of Starbucks coffee.
iPod index – An Australian bank tried a version of the Big Mac index using iPod prices.
Billy Index – Introduced by Bloomberg L.P., it converts local prices of IKEA’s Billy bookshelf into US dollars to compare prices.
Gold Mac Index – This index calculates PPP based on how many burgers can be bought with one gram of gold in a specific country.
Thalinomics – This concept points out the rate of inflation in vegetarian and non-vegetarian thalis (meals).
So, were you familiar with the Big Mac Index before?
Written By Shivani Singh
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