Big Mac Index
Introduction
The history of the Bic Mac index started with Economist since 1956 and published annually. It is termed as a natural indicator of an economy person’s buying ability or Purchasing Power Parity (PPP) amongst countries and economies. According to Ashenfelter & Jurajda (2001), The concept behind the Bic Mac index is based on the notion that the exchange rates of economies should seek to move towards equalization of prices of identical commodities between different economies. However, currently, prices do not always depict the cost of living, as this is determined by wages and other costs like housing and transport, which is subject to a foreign currency like the American dollar.
Consequently, the Big Mac Index only considers Big Mac Burger prices as set by McDonald’s globally. Therefore, Ong (2003), Big Mac PPP exchange rate between two economies, is calculated by dividing the price of a Big Mac in one economy by the subsequent price of Big Mac in another economy to give the exchange rate. The value obtained is used to identify overvalued currency and undervalued currencies. In this, if the value obtained is higher than the average exchange rate, this is interpreted to mean that the first currency is overvalued. Similarly, if this value is lower than the standard exchange rate, the first currency is undervalued concerning the second. This is sometimes referred to as e index “Burgeronomics.”
Most Undervalued
South African Rand by 64.5%
- Russian Ruble by 61.24%.
- Turkish Lira by 61.04%,
- Romanian Leu by 61.02%
- Azerbaijani Manat by 58.94%
- Ukrainian hryvnia,
Most Overvalued
- Swiss franc 4%
- Norwegian krone by 5.32%
- Eurozone Euro by 19.19%
- Iceland Krone by 66%
As known, Switzerland is one of place with the highest living standard. This is brought about and sustained by higher wages and taxes, making most items to be priced high, and Big Macs is one of them. Therefore, high prices of items coupled with a strong economy, make the economy currency to be overvalued. However, the US currency is valued at the midpoint of zero since it is the blueprint of all currencies.
References
Ashenfelter, O., & Jurajda, S. (2001). Cross-country comparisons of wage rates: The Big Mac index. Unpublished paper, available at http://economics. uchicago. edu/download/bigmac. pdf.
Ong, L. (2003). The Big Mac Index: applications of purchasing power parity. Springer.