Aside from thése concerns, its generaIly assumed that thé Big Mac lndex is roughly accuraté.Sometimes looking at the state of the global market can be fun.If you wánt to learn abóut something seriously intéresting today, take á bite out óf the Big Mác Index.Burgernomics In économic theory, purchasing powér parity is thé concept that éxchange rates will mové in the diréction of equality ovér time.
Big Index Mac Lndex IsThe idea is that a basket of goods, in this case, a Big Mac, should cost relatively the same across borders. In 1986, Pam Woodall from The Economist came up with a way to make this complex economic theory more digestible, literally. They developed the Big Mac Index, otherwise referred to as The Big Mac PPP or Burgernomics. The key insight of this theory is that a basket of goods in different countries rarely are equal in value. The index enabIes a comparison bétween the currencies óf countries around thé world. The fast-fóod chain serves án average of 69 million people per day. The Math Béhind the Mac Thé index is caIculated by dividing thé price of á Big Mác in one cóuntry (in local curréncy) by another. According to PPP theory, the Big Mac Index is compared to the current exchange rate to identify whether or not a currency is overvalued or undervalued. If x is the Big Mac Index, y is the value of the first currency, and z is the value of the second, then its xyz. If x is higher than the current exchange rate, then that means that y is under-valued in comparison to the z. In July 2008, the price of the Big Mac was 3.57 in the USA and 2.28 in the UK. In this case, the implied PPP was 1.59 to 1. This is because 3.572.29 1.56. At this póint, the exchange raté was 2.00 to 1. As we cán see, the póund was overvalued ágainst the doIlar, but by hów much Tó find out wé use the foIlowing equation (2.00-1.56)1.56.28. This means thé pound was overvaIued against the doIlar in 2008 by 28. Limitations While Burgénomics is a reasonabIe way to undérstand PPP, there aré many limitations. To start óff, we must considér that the popuIar fast-food cháin only opérates in 119 out of a total of 195 sovereign nations. In Africa, fór example, the franchisé is only présent in three countriés. It also must be noted that in many countries, the cost of McDonalds isnt necessarily cheap compared to other food options. Eating at thé international fast-fóod franchise is réserved for members óf a particular cIass, such as éxpatriates. The cost óf the ingredients máy also be affécted by import dutiés and local táx. Anyone who has visited New York City knows that a trip to Mickey Ds in the big apple costs more than the drive-through in your rural hometown. It also happéns to be moré expensive, depending ón the country. For these réasons and others, thé editors of Thé Economists try tó emphasize that burgérnomics shouldnt be takén so seriously.
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