The Big Mac index

The Big Mac Index is a currency index implementing the Purchasing-Power Parity theory (PPP). The Index was originally created in 1986 by ‘The Economist’.

 

What is the Big Mac Index?

The Big Mac index is a currency index that uses the famous Big-Mac Menu to show if the global currencies are trading at their ‘fair levels’. This funny but economically-logical approach is called as the ‘Burgernomics’ and has been the subject of tens of Academic Studies around the world.

 

Big Mac index and the PPP Theory

Actually, the Big Mac index is an implementation of the Purchasing-Power Parity theory (PPP). According to the PPP theory, the long run currency rates should fluctuate in a manner that equalizes the price of identical goods and services. In the case of the Big Mac index, the price used is the price of the Big Mac burger.

According to the PPP theory, the long run currency rates should fluctuate in a manner that equalizes the price of identical goods and services

 

An Example using the Big Mac index

Let’s say that the price of the Big Mac burger during summer averaged $5.00 in the US and $2.50 in Indonesia. According to the Big Mac index, the Indonesian currency is undervalued by 50%.

Here is the link to the official Big-Mac Indexhttp://www.economist.com/content/big-mac-index

 

HotForex Analysis

 

Big Mac Index Comparison Table

This is the comparison table based on the Big Mac Index, as it was published in July 2014 (The Economist).

Country

Local Price

Dollar Exchange Rate

Price in Dollars

Dollar PPP

Implied Dollar Valuation

Australia

5.1

1.06

4.81

1.06

0.40

Brazil

13

2.22

5.86

2.71

22.11

Britain

2.89

0.59

4.93

0.60

2.71

Canada

5.64

1.07

5.25

1.18

9.51

China

16.9

6.20

2.73

3.52

-43.14

Denmark

28.5

5.54

5.15

5.94

7.31

Euro area

3.67923829

0.74

4.95

0.77

3.31

Hong Kong

18.8

7.75

2.43

3.92

-49.41

India

105

60.09

1.75

21.90

-63.56

Indonesia

27939

11505.00

2.43

5826.69

-49.36

Israel

17.5

3.41

5.13

3.65

6.91

Japan

370

101.53

3.64

77.16

-24.00

Malaysia

7.63

3.17

2.41

1.59

-49.76

Mexico

42

12.93

3.25

8.76

-32.27

New Zealand

5.7

1.15

4.94

1.19

3.12

Norway

48

6.19

7.76

10.01

61.79

Pakistan

300

98.68

3.04

62.57

-36.60

Peru

10

2.79

3.59

2.09

-25.20

Philippines

160

43.21

3.70

33.37

-22.77

Russia

89

34.84

2.55

18.56

-46.72

Saudi Arabia

11

3.75

2.93

2.29

-38.83

Singapore

4.7

1.24

3.80

0.98

-20.82

South Africa

24.5

10.51

2.33

5.11

-51.41

South Korea

4100

1023.75

4.00

855.06

-16.48

Sweden

40.7

6.84

5.95

8.49

24.17

Switzerland

6.16

0.90

6.83

1.28

42.36

Taiwan

79

29.98

2.63

16.48

-45.05

Thailand

99

31.78

3.12

20.65

-35.03

Turkey

9.25

2.09

4.42

1.93

-7.75

UAE

13

3.67

3.54

2.71

-26.19

United States

4.795

1.00

4.80

1.00

0.00

Austria

3.39

0.74

4.56

0.71

-4.81

Belgium

3.7

0.74

4.98

0.77

3.89

France

3.9

0.74

5.25

0.81

9.51

Germany

3.67

0.74

4.94

0.77

3.05

Greece

3.05

0.74

4.11

0.64

-14.36

Ireland

3.49

0.74

4.70

0.73

-2.01

Italy

3.85

0.74

5.18

0.80

8.10

Netherlands

3.45

0.74

4.64

0.72

-3.13

Portugal

3

0.74

4.04

0.63

-15.77

Spain

3.65

0.74

4.91

0.76

2.49

 

 

The Big Mac index

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