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VIDEOReal or Ridiculous? The Big Mac Index
By
Laurie Petersen Feb 22, 2010 12:30 pm
What does the cost of a burger in Tokyo have to do with your purchasing power?
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The price of a US McDonald’s (MCD) Big Mac is the base for comparison. Given the worldwide name recognition, relative product standardization, and availability of the Big Mac in 120-odd countries, the index is something many lay people can wrap their heads around.
The way the index works is that it measures the relative price of a Big Mac in dozens of currencies. It’s based on the rule of purchasing power parity, which states that exchange rates should move to make the price of goods the same in each country.
So how well does Burgernomics work?
The Big Mac Index is useful for travelers, giving a good idea about which countries are “expensive,” and which are not, says economics professor Robert Barsky from the University of Michigan. For example, if you're traveling to Australia this year, plan on paying $4 for the double beef patty sandwich.
“It is less clear, however, that a pop index is a good predictor of changes in the exchange rate over time,” Barsky adds, because “the Big Mac is in large measure, a measure of the non-tradeable component of the Consumer Price Index. There is no strong reason that the prices of non-tradeables should be equalized across countries.”
While The Economist claims the index has been a pretty good predictor of movements in currency values, there’s no clear benchmark to compare to in order to evaluate how accurate it has been historically, adds Tara Sinclair, assistant professor of economics and international affairs at The George Washington University.
“One thing we can see from the numbers is that it’s rare for a Big Mac to cost the same in dollars across countries,” she says.
According to the most recent index, released on January 6, the Norwegian kroner is the most overvalued currency against the dollar. Expect to pay around $7 for a Big Mac in Oslo.
The Chinese yuan, meanwhile, is undervalued by 49%.
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