Burgernomics!

The Big Mac IndexNERC March 13, 2006

Judy Heine Retired, Canton (MA) & MA Council on Econ Ed

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The Big Mac Indexor

“Burgernomics”

The Big Mac Indexor

“Burgernomics”

•Created by ‘The Economist’ in 1986

• Tracks 20 yrs of data• Published Quarterly!

The Big Mac Index

* Big Mac has same recipe (ingredients) in 120 countries

* So, Big Mac SHOULD cost same in each country, but it Doesn’t!!

The Big Mac Index

* Based on notion that a dollar should buy the same amount in all countries

(Purchasing Power Parity or PPP)

* In the long run, exchange rates between two currencies should move towards the rate that equals the price of an identical basket of goods & services in each country

Big Mac Index

• Purchasing Power Parity (PPP) is a measure of the relative purchasing power of different currencies.

• PPP is measured by the price of the same goods in different countries, compared to the product in the ‘base currency’

• Big Mac Index compares Big Mac prices in US Dollars to price in other nations

Big Mac Index

• Visual display created quarterly by The Economist

• Comparing, over time, shows changes in strength of currencies

Big Mac Index

• Currency values fluctuate daily

• Measures one currency in relation to another

• Can compare price of Big Mac in another nation to that in USA!

Big Mac Index

Comparing a currency’s actual exchange rate with its PPP is one test of whether the currency is undervalued or overvalued.

Big Mac IndexIs other nation’s

currency:* OVERVALUED? Costs MORE to buy Costs MORE to buy

Big Mac than in USABig Mac than in USA or

* UNDERVALUED?Costs LESS to buy Big Mac than in USA

Making Your OWN Big Mac Index

Formula: #1 Derive PPP

Foreign Price = PPP

US Price

Making Your OWN Big Mac Index

Formula: #2To determine if Currency is

overvalued or undervalued against US Dollar

(PPP-Exchange Rate) X 100 Exchange Rate

What can be learned fromBig Mac Index?

• Emerging nations have weak currencies

• Expensive for them to buy from nations with strong currencies

• Expensive for US to buy from nations with overvalued currency

What can be learned from Big Mac Index?

Implications for Foreign Trade:

Can US sell to other nations easily if their currencies are:

Undervalued?

Overvalued?

The Big Mac Index (or “Burgernomics”) seeks to make Exchange Rate theory

more “Digestable.”

Big Mac Index• May be ‘hard to

swallow’ for some• PPP holds true in long-

run even if:

--- local prices distorted by trade

--- barriers on beef

--- sales taxes or difference

in property rents!

Big Mac Index • Doesn’t compare real purchasing power of

currencies around the world!• USB has created another index that aims to

measure well-being by estimating # minutes workers in various countries must toil to buy a Big Mac– EX: Kenya = 3 hours USA = 10 minutes!

Differences reflect variations in productivity and disparity in cost of ingredients

Burgernomics!

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