The Big Mac Index

What is the Bic Mac Index?

Introduced in September 1986 as a way of measuring the purchasing power parity (PPP) between two currencies A Big Mac was chosen because of its availability it is produced in 120 countries Shows the amount of time an average worker in a particular country has to work in order to be able to buy a Big Mac
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What is the Bic Mac Index?

What is the Bic Mac Index?

A Big Mac should cost the same in two currencies of two given countries - the notion that a dollar should buy the same amount in all countries The Big Mac theory (or PPP) says that exchange rates should even out the prices of Big Macs sold across the world Shows how far from fair value different world currencies are
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Country United States Argentina Australia Brazil Britain Canada Chile China Colombia Costa Rica Czech Republic Denmark Eygpt Estonia Euro area Hong Kong Hungary Indonesia Israel Japan Latvia Lithuania Malaysia Mexico New Zealand Norway Pakistan Peru Philippines Poland Russia

Big Mac Price in Local in US dollars Currency $ 3.73 3.7300 Peso 14 3.4775 A$ 4.35 4.4082 Real 8.71 5.2347 2.29 3.6817 C$ 4.17 4.2831 Peso 1750 3.6137 Yuan 13.2 2.0044 Peso 8200 4.3764 Colones 2000 3.9783 Koruna 67.6 3.8604 DK 28.5 5.3064 Pound 13 2.1975 Kroon 32 2.8060 3.38 4.6977 HK$ 14.8 1.9001 Forint 740 3.7638 Rupiah 22780 2.5969 Shekel 14.9 4.1530 320 3.9070 Lats 1.55 3.0333 Litas 7.3 2.9214 Ringgit 7.05 2.3210 Peso 32 2.6824 NZ$ 5 3.7111 Kroner 45 8.0253 Rupee 210 2.4579 New Sol 10 3.5951 Peso 102 2.3405 Zloty 8.3 2.8736 Rouble 71 2.4789

Implied PPP rate + --3.75 1.17 2.33 0.61 1.12 469 3.54 2196 536 18.1 7.63 3.48 8.57 0.91 3.96 198 6102 3.99 85.7 0.42 1.96 1.89 8.57 1.34 12.1 56.30 2.68 27.3 2.22 19.0

Today's Exchange Rate 1 USD = 1.0000 4.0259 0.9868 1.6639 0.6220 0.9736 484.264 6.5855 1873.67 502.730 17.5110 5.3709 5.9158 11.4040 0.7195 7.7892 196.608 8771.93 3.5878 81.9037 0.5110 2.4988 3.0375 11.9295 1.3473 5.6073 85.4401 2.7816 43.5813 2.8884 28.6415

Over(+) / Under(-) Valuation against the USD, % ++ ---6.8531 18.5651 40.0325 -1.9293 15.0370 -3.1520 -46.2455 17.2031 6.6179 3.3636 42.0619 -41.1745 -24.8509 26.4767 -49.1604 0.7080 -30.4372 11.2102 4.6351 -17.8082 -21.5623 -37.7778 -28.1613 -0.5418 115.7901 -34.1059 -3.6526 -37.3585 -23.1408 -33.6627

How to read the table?

If a Big Mac costs 3.38 in countries that use the Euro and $3.73 in the US, then the implied PPP rate is 3.38/3.73 = 0.91 If the actual exchange rate EUR/USD is lower than the implied PPP rate, the Big Mac theory suggests that the value of the EUR might go up until it reaches the implied PPP rate If the actual exchange rate is higher, then it might be expected the EUR to go down until it hits the implied PPP rate

How to calculate?

Big Mac cost in USA: 3.73$

Big Mac cost in Eurozone: 3.38

Exchange rate: 1 = 0,72 $

26,39 % overvalued against US$

What is the Bic Mac Index?

What is the Bic Mac Index?

In the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country (Bic Mac the basket) Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued Limitations of the Big Mac index:
o Taxes, o Local preferences, o Social status, o Import and Export legal regulations

Conclusions
Currencies stabilize each other, for example if the euro is going down another currency will go up. Some countries like China try to keep its currency undervalued in order to have competitive goods to trade and by that mean have a big reserve of foreign currencies to use when needed, also of course to boost the grow of their economy. The Big Mac index is a common and simple method to compare the currencies.

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The End

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