The Big Mac Index is an index published by The Economist magazine showing the price level and purchasing power of many countries. The index takes its name from Big Mac, a type of hamburger sold in McDonald’s restaurants. It was first published in September 1986. Here is Big Mac Index by Country.
What is the Big Mac Index
The Big Mac Index is an index based on Purchasing Power Parity (PPP) theory by The Economist magazine. The PPP theory states that in the long term, exchange rates should be determined by proportioning the same amount of product to the price in different countries.
According to the SAGP theory, the price of Big Mac in a country gives information about the price of materials used in the Big Mac, from the price of ingredients to local production and advertising prices. As a result, the SAGP measurement is seen by many economists as a reasonable parameter in measuring purchasing power. But exceptions are always present.
The Working Logic of the Big Mac Index
The Big Mac Index is calculated by dividing Big Mac’s price in a country using local currencies by dividing the price of Big Mac in another country. The result is then compared to the official value of the exchange rate, and the currency in question is compared to what is required.
The Consumer Price Index (CPI), which is a key measure to measure inflation, aims to take all products into account, but most economists believe that certain products give more accurate figures than others. The biggest disadvantage of the Big Mac Index is its limitation on the economic indicator as it is based on a single product.
The Big Mac Index also has a number of variants that are useful for investors. For example, the UBS Asset Management Company has also developed this index by calculating how much time it takes to buy one Big Mac in a country by adding hourly work fees. Different groups have developed different indices based on Starbucks coffees, Apple’s iPod products, or Ikea’s Billy model libraries, for example, the KFC Index used to measure purchase parity by comparing exchange rates in African countries.
The KFC Index takes its name from the Kentucky Fried Chicken (KFC), an international fast food chain, and modeled on the Big Mac Index, which the Economist uses to measure the exchange rates of the countries where McDonald’s restaurants are located (around 60 countries). On the African continent, McDonald’s is located only in Morocco, the Republic of South Africa and Egypt.
On the other hand, KFC is located in more than 20 African countries. This figure is more applicable than any other international fast food chain. This index was not developed in order to determine the deviations of money value as 100%, the purpose of this index is to make the exchange rate theory more digestible.
Using the Big Mac Index
Investors in the US may not need the Big Mac Index because there are other more reputable indices, such as the Consumer Price Index, but the Big Mac Index is a reliable unit of measurement, especially where official figures are not published or where figures are likely to be manipulated by the state.
Experts, for example, believe that the Argentine government has been playing with the Consumer Price Index in order to make the inflation between 2010 and 2012 lighter than it is. Therefore, The Economist, using the Big Mac Index, found that the price of the Big Mac was higher than the government’s inflation rate (10%) in January 2011 (19%).
Investors can use the Big Mac Index for many different purposes. For example, they can use this index to determine whether a currency exchange rate is more than the market or less valuable. Similarly, investors can measure changes to see inflation rates and compare the figures with the official rates described.