Big Mac Index

BIG MAC INDEX A look into purchasing power from the standpoint of a Big Mac HISTORY • Introduced in 1986 by Pam Woodall in The Economist. (Paper in London) • It started as humorous, but is now a popular way to observe purchasing power from country to country. WHY IT WORKS • BIG MACS are sold in 120 states • Prices of the exact same McDonald's burger can vary big time from country to country • By observing the BIG MAC we have a single constant product which allows us to compare prices and PPP. A LOOK AT THE NUMBERS • Roughly 2.5 million BIG MAC’s are consumed every day • That’s over 900 million BIG MAC’s each year! • 47 billion have been eaten worldwide • One man has eaten 26,000 on his own. His name is Don Gorske IN COMPARISON BIG MAC Index PPP • The BIG MAC index is a fun way to • Economic theory used to determine compare the value of different the relative value of currencies currencies around the world. • Estimates exchange rate between • By looking at the prices of BIG MAC’s countries in order for the exchange to we can see which countries have more be equal to the currency's purchasing purchasing power. power. A HEALTHY CHOICE • 550 Calories • 1100 mg of protein • 75 mg of cholesterol • 260 calories from fat BURGER PRICES Country Price in US dollars Switzerland $6.81 Australia $4.94 United States $4.20 Mexico $2.70 China $2.44 India $1.62 EXTENDED RESEARCH • The USB Wealth Management has done research to include a Working Time BIG MAC Index to show approximately how long a person has to work in order to make enough money for a BIG MAC THANK YOU MCDONALDS! DON GORSKE HAS A SECRET STASH OF BIG MAC’S IN HIS BASEMENT FREEZER .

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Burgernomics: a Big Mac Guide to Purchasing Power Parity
Burgernomics: A Big Mac™ Guide to Purchasing Power Parity Michael R. Pakko and Patricia S. Pollard ne of the foundations of international The attractive feature of the Big Mac as an indi- economics is the theory of purchasing cator of PPP is its uniform composition. With few power parity (PPP), which states that price exceptions, the component ingredients of the Big O Mac are the same everywhere around the globe. levels in any two countries should be identical after converting prices into a common currency. As a (See the boxed insert, “Two All Chicken Patties?”) theoretical proposition, PPP has long served as the For that reason, the Big Mac serves as a convenient basis for theories of international price determina- market basket of goods through which the purchas- tion and the conditions under which international ing power of different currencies can be compared. markets adjust to attain long-term equilibrium. As As with broader measures, however, the Big Mac an empirical matter, however, PPP has been a more standard often fails to meet the demanding tests of elusive concept. PPP. In this article, we review the fundamental theory Applications and empirical tests of PPP often of PPP and describe some of the reasons why it refer to a broad “market basket” of goods that is might not be expected to hold as a practical matter. intended to be representative of consumer spending Throughout, we use the Big Mac data as an illustra- patterns. For example, a data set known as the Penn tive example. In the process, we also demonstrate World Tables (PWT) constructs measures of PPP for the value of the Big Mac sandwich as a palatable countries around the world using benchmark sur- measure of PPP.
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The Big Mac Index: a Shortcut to Inflation and Exchange Rate
CORE Metadata, citation and similar papers at core.ac.uk Provided by Clute Institute: Journals International Business & Economics Research Journal – July/August 2014 Volume 13, Number 4 The Big Mac Index: A Shortcut To Inflation And Exchange Rate Dynamics? Price Tracking And Predictive Properties Luis San Vicente Portes, Montclair State University, USA Vidya Atal, Montclair State University, USA ABSTRACT The Economist magazine has been publishing the Big Mac Index using it as a rule of thumb to determine the over- or under-valuation of international currencies based on the theory of Purchasing Power Parity since 1986. According to the theory, using the Big Mac as a tradable single-good basket, the Dollar-value of the hamburger should be equalized around the world due to arbitrage. The popularity and following of the Big Mac Index led the authors to the following two questions: 1) How effective is the Big Mac price as an indicator of overall inflation? and 2) how accurate are exchange rate movement predictions based on Big Mac prices? They find that Big Mac prices tend to lag overall inflation rates, which is highly important in studies that use Big Mac prices as measures of affordability or real incomes over time. As a guide to exchange rate movements, there is support for the theory of Purchasing Power Parity, but only as a qualitative indicator of movement in the nominal exchange rate in rich and economically stable countries, proving less effective in forecasting exchange rate movements in emerging markets. The statistical analysis is carried out using data from 1986 to 2012 from The Economist and from the World Bank for 54 countries.
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Apple Indices As a New Informal Measure of Purchasing Power Parity 109
H. Joši þ, A. Bariši þ: Apple indices as a new informal measure of purchasing power parity 109 PREGLEDNI RAD UDK: 339-133.3:<061.6:004> Hrvoje Joši þ, Ph.D. * Antea Bariši þ, mag. oec. ** APPLE INDICES AS A NEW INFORMAL MEASURE OF PURCHASING POWER PARITY APPLEOVI INDEKSI KAO NOVI NEFORMALAN NA ÿIN MJERENJA PARITETA KUPOVNE MO ýI ABSTRACT: This paper examines the validity of the Purchasing Power Parity (PPP) theory, using 12 different single-product baskets of Apple devices. Given the presented advantages of Apple indices as PPP measurement in comparison to the most prominent informal index- the Big Mac index (BMI), they are therefore pointed out to be more ade- quate modern measures of PPP. Presented study investigates if the theory holds for different products within the same niche across 37 countries. Furthermore, this paper presents results of cross country ordinary least squares (OLS) regression analysis of the data for 6 different Apple products. Results point out that most-favoured nation (MFN) duty rates and sales taxes together with additional duties and taxes are main factors that affect currency valua- tion against the U.S. dollar. In contrary to BMI, Apple indices indicate real undervaluation of most of the national currencies against the U.S. dollar and have also shown to be more supportive to the PPP validity than the BMI. KEY WORDS: Law of one price, Purchasing power parity theory, Apple indices, Big Mac index. SAŽETAK: Ovaj Ālanak ispituje valjanost teorije pariteta kupovne mo þi (PPP) ko- riste þi 12 razli Āitih proizvoda iz košarice Appleovih proizvoda.
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Burgernomics: an Instructional Case on the Law of One Price Carolin E
Journal of Business Case Studies – Second Quarter 2016 Volume 12, Number 2 Burgernomics: An Instructional Case On The Law Of One Price Carolin E. Schmidt, Heilbronn University, Germany ABSTRACT Jane just moved back to her hometown in Western New York to start a job at a bank. One evening, she meets her old friend Sally, who traveled the world for the past five months and tells Jane about her experiences with the different price levels in all the countries that she visited. Jane, being a recent graduate in international economics and finance, understands the underlying dynamics that are due to exchange rate theory and sheds light on the price discrepancies prevailing between the different currencies. This case focuses on the construction of the Big Mac index and on conveying the theoretical basis of the index (Purchasing Power Parity and the Law of One Price) to undergraduate students in business and economics. It is appropriate for use in undergraduate courses such as international finance, financial markets or international economics. It could also be used in (international) marketing courses to show the importance of product pricing. Keywords: Law of One Price; Purchasing Power Parity; Exchange Rate Theory; Big Mac Index LEARNING OBJECTIVES ndergraduate students often struggle with the alleged irrelevance of economic theories for their future careers in the corporate world. Fortunately, in 1986, The Economist invented the Big Mac index to U “make exchange-rate theory more digestible” (The Economist, 2015). This teaching case uses the Big Mac index to convey the Law of One Price and Purchasing Power Parity Theory to undergraduate business and economics students.
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An Extention of Burgernomics: Using a Full-Service Restaurant to Measure Purchasing Power Parity
Journal of Hospitality Financial Management The Professional Refereed Journal of the International Association of Hospitality Financial Management Educators Volume 15 Issue 1 Article 6 2007 An Extention of Burgernomics: Using a Full-Service Restaurant to Measure Purchasing Power Parity David Bojanic Rod Warnick Michael Musante Follow this and additional works at: https://scholarworks.umass.edu/jhfm Recommended Citation Bojanic, David; Warnick, Rod; and Musante, Michael (2007) "An Extention of Burgernomics: Using a Full- Service Restaurant to Measure Purchasing Power Parity," Journal of Hospitality Financial Management: Vol. 15 : Iss. 1 , Article 6. Available at: https://scholarworks.umass.edu/jhfm/vol15/iss1/6 This View Point is brought to you for free and open access by ScholarWorks@UMass Amherst. It has been accepted for inclusion in Journal of Hospitality Financial Management by an authorized editor of ScholarWorks@UMass Amherst. For more information, please contact [email protected]. AN EXTENSION OF BURGERNOMICS: USING A FULL-SERVICE RESTAURANT PRODUCT TO MEASURE PURCHASING POWER PARITY David Bojanic Rod Warnick And Michael Musante ABSTRACT The purpose of this paper is to determine if the price of a ‘burger’ at a themed restaurant chain (i.e., Hard Rock Café) in the casual dining segment is a better indicator of purchasing power parity (PPP) than the price of a ‘burger’ at a quick-service restaurant chain (i.e., McDonald’s). The “Big Mac Index” published by The Economist is the source for the price of a Big Mac sandwich in each of the represented countries. The index was originally developed to measure purchasing power parity based on exchange rates.
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Volume 36, Issue 4
Volume 36, Issue 4 iPad Purchasing Parity: Farewell to the Big Mac Index Sandeep Mazumder Wake Forest University Abstract It has been 30 years since The Economist magazine launched its popular Big Mac index-a playful way to test the theory of purchasing power parity (PPP). In this light-hearted follow-up investigation on the use of a single product to test PPP, we present evidence that The Economist should now ditch Big Macs and instead turn to iPads. When using data on Apple's iPad tablet computer, we find that the international prices on this product conform much more closely to PPP than the Big Mac does. This is in turn driven by the tradable nature of iPads, unlike the Big Mac which is a perishable product. Thus it is time to bid farewell to the Big Mac index in its 30th year, and time to usher in an updated test of PPP, namely the iPad index. Citation: Sandeep Mazumder, (2016) ''iPad Purchasing Parity: Farewell to the Big Mac Index'', Economics Bulletin, Volume 36, Issue 4, pages 2128-2136 Contact: Sandeep Mazumder - [email protected]. Submitted: September 06, 2016. Published: November 09, 2016. 1 Introduction In 1986, The Economist magazine invented a light-hearted way in which to test the theory of purchasing power parity (PPP), namely the Big Mac index (for more details see The Economist, 2016). While the Big Mac index cannot seriously be a test of PPP since we consume far more goods and services than just Big Macs, it has become a global standard which is even included in several economic textbooks while also being the subject of numerous academic studies.
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Big Maccurrencies the Dollar No Longer Looks Cheap Compared with the Other Big Currencies
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Currency Valuation and Purchasing Power Parity Currency Valuation and Purchasing Power Parity
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Retail Prices and the Real Exchange Rate∗
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The Big Mac Index This Page Intentionally Left Blank the Big Mac Index Applications of Purchasing Power Parity
The Big Mac Index This page intentionally left blank The Big Mac Index Applications of Purchasing Power Parity Li Lian Ong © Li Lian Ong 2003 Foreword © Bill Shields 2003 Softcover reprint of the hardcover 1st edition 2003 978-1-4039-0310-5 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2003 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-50855-6 ISBN 978-0-230-51241-2 (eBook) DOI 10.1057/9780230512412 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources.
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Purchasing Power Parity: Even October 1999 the Big Mac Can Predict FX Rates
Purchasing Power Parity: Even October 1999 The Big Mac Can Predict FX Rates FQ Perspective by Dori Levanoni and Max Darnell Many academics and practitioners have claimed that the principle Now Big Macs don’t keep too well if transported across the sea, but models for measuring the fair value of a currency simply don’t work. other items such as bars of gold, cars, electronic equipment, rice and Purchasing Power Parity (PPP), in both its “strong form” and its wheat do. If you found that the price of goods in Japan were lower “weak form” are said to fail, particularly over short-term horizons. than the price of goods in the US, then provided that either Some published studies do support the notion that PPP works over transportation costs were low enough, or the cost differential itself very long-term horizons – as long as 5, 10 or even 50 year spans – were large enough, then one could profit from buying goods in Japan but they do not tend, if ever, to support the notion that PPP is at and selling them in the US. This potential for arbitrage should work over horizons as short as a year or a month. Despite that, a ultimately insure that the prices of very similar goods don’t get too measure as simple as the “Big Mac Index” published yearly by the far out of line across the ocean. Economist appears to work modestly well, and more sophisticated PPP constructions such as that from the World Bank and that Arbitrageurs would not only drive the relative price of goods up in belonging to First Quadrant appear to work quite well.
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Big Mac Index and Effective Exchange Rates: the Us Dollar, the Euro, and the Yuan
BIG MAC INDEX AND EFFECTIVE EXCHANGE RATES: THE US DOLLAR, THE EURO, AND THE YUAN Thomas J. O’Brien* Santiago Ruiz de Vargas** April 2016 ABSTRACT This study is an investigation of currency misvaluation estimates relative to several different effective exchange rate (EER) baskets, given The Economist’s two Big Mac index methods of intrinsic currency valuation (raw and adjusted). We find that a currency’s misvaluation estimates have tended to be relatively consistent across the different EER basket compositions for the adjusted Big Mac method but not for the raw Big Mac method. For the adjusted Big Mac method, the Chinese yuan’s estimated undervaluation gradually diminished after January 2011 until the yuan was slightly overvalued as of January 2016. *Department of Finance, University of Connecticut, School of Business, 2100 Hillside Road, Storrs, CT 06269-1041; [email protected] **Financial Advisory Services, NOERR AG, Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Brienner Str. 28, 80333 Munich; [email protected] For helpful suggestions and discussions, we thank Kenneth Clements, Assaf Eisdorfer (especially), Lok Sang Ho, and Jiawei Si. BIG MAC INDEX AND EFFECTIVE EXCHANGE RATES: THE US DOLLAR, THE EURO, AND THE YUAN The term effective exchange rate (EER) refers to an exchange rate between a given currency and a basket of currencies. That is, an EER is essentially a currency index from the perspective of the given currency. An EER is deemed to be a more effective way to measure a given currency’s value than a bilateral exchange rate between the given currency and another individual currency (Chinn, 2006). With an EER and a standard of intrinsic foreign exchange (FX) value, like purchasing power parity (PPP) for example, one can estimate a given currency’s overall misvaluation versus other currencies in general.
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