The Big Mac Index

THE BIG MAC INDEX Coined 'Burgernomics,' the Big Mac Index has become a global standard of determining purchasing power between two currencies by comparing the cost of the McDonald's burger in any two countries. OVERVIEW The average price of a Big Mac is compared to demonstrate the value of a currency. For example, a Big Mac costs $4.07 in the U.S. compared to $2.27 in China. The burger is 44% cheaper in China, which suggests the yuan is 44% undervalued against the dollar. HOW WAS IT CREATED? WHAT IS IT? VARIANTS The Big Mac Index was introduced in The Economist in September 1986 as an illustration demonstrating exchange-rate theory. An informal way of measuring the Purchasing Power Parity (PPP) between two currencies - a comparison of currency value. In 2004, the Tall Latte index featured a Starbucks Coffee. In 2007, the iPod Index was considered more consistent, but criticized for ignoring shipping costs. IKEA also made an appearance in 2009 with Bloomberg's Billy Index. The Economist The nomist wwwwwww. 2 HOW IT IS CALCULATED Compare this value with the current exchange rate. The implied PPP of the Brazilian Real was $2.34. The actual exchange was $1.54. 1 Divide the price of a Big Mac in one its local country currency) by the price of a Big Mac in another country (in its local currency). US$4.07 The Big Mac Index suggests 2$ most emerging-market currencies are significantly undervalued. In July 2011, a Big Mac in Brazil was 3 A lower value indicates the first currency has been undervalued; a higher value indicates the first currency is overvalued. The Brazilian Real was overvalued by the equivalent of $6.16 US dollars. R$9.50 149%. 3 THE INDEX The PPP of the hamburger standard signals where exchange rates should move in the long run. The raw index offers a predicted value compared to the adjusted GDP based on average income. Big Mac prices vs. GPD per person +149% Burgernomics July 2011 $9 +101% Country Line Of Best Fit Brazil +36% +24% The current fair value of a currency +63% $6 Euro Area +3% US -43% UK Japan $3 Average prices should be lower in poor countries than in rich China Index adjusted for GPD per person ones because labor costs are lower. $20,000 $40,000 $60,000 $80,000 $100,000 GDP Per Person AN ALTERNATIVE BIG MAC INDEX Tokyo LA Chicago In 2009, UBS Wealth Management Research expanded the idea of the Big Mac Index to 10 min 11 min 12 min E New York City 13 min Sydney 14 min demonstrate the amount of time an average worker in a given country must work to buy a Big Mac. Toronto Zurich 14 min 15 min Paris 20 min Shanghai 30 min 12 Budapest 59 min 180 Average global working time to buy a Big M ulululwlw Nairobi Cairo 158 min 82 min Jakarta Most Expensive Burgers 136 min 120 Mexico City 129 min Least Expensive Burgers Norway $7.20 (45Kr) Sweden Switzerland $6.19 (6.50CHF) (9.50R$) Brazil $5.77 Croatia $3.00 Malaysia $2.27 China $1.95 Hong Kong Ukraine $1.90 Denmark $6.56 (48KK) $4.90 (28.5Kr) $1.84 (July 2010) (not considering the fact that the buyer's equivalent purchasing power is different) ISSUES & LIMITATIONS CURRENCY VALUES The 5 most overvalued and 5 most undervalued currencies - Big Mac Index 2011 Demand, local taxes, tourism, local competition, production and delivery costs, advertising, rent and wages vary between countries and are not 200% always wholly representative of a country's economy. The Big Mac varies in size, nutrition and even content from country to country. Varying markets mean that to maximize profit margins, relative prices are not just reflective of currency values, but also sale volumes. A Big Mac costs more in New York City than in Adel, Georgia. -200% SOURCES: °MBA en.wikipedia.org, economist.com, bigmacindex.org, dallasfed.org Information Provided By: http://www.onlinemba.com/ nJod Argentina Hong Kong Euro Area Canada Big Mac Prices Brazil (%6L+ Colombia (%8-) - 38 minutes (9%80 L+) UBMIBI (%2-) (+101%) Singapore Sweden (%9-) (+85%) Saudi Arabia (%E- pUBuazuMS (%£9+)