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Burgernomics!

The Big Mac Index NERC March 13, 2006 Judy Heine Retired, Canton (MA) & MA Council on Econ Ed. Burgernomics!. The Big Mac Index or “Burgernomics”. The Big Mac Index or “Burgernomics”. Created by ‘The Economist ’ in 1986 Tracks 20 yrs of data

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Burgernomics!

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  1. The Big Mac Index NERC March 13, 2006 Judy Heine Retired, Canton (MA) & MA Council on Econ Ed Burgernomics!

  2. The Big Mac Indexor “Burgernomics”

  3. The Big Mac Indexor “Burgernomics” • Created by ‘The Economist’ • in 1986 • Tracks 20 yrs of data • Published Quarterly!

  4. 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!!

  5. 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

  6. 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

  7. Visual display created quarterly by The Economist Comparing, over time, shows changes in strength of currencies Big Mac Index

  8. 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

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

  10. Is other nation’s currency: * OVERVALUED? Costs MORE to buy Big Mac than in USA or * UNDERVALUED? Costs LESS to buy Big Mac than in USA Big Mac Index

  11. Formula: #1 Derive PPP Foreign Price = PPP US Price Making Your OWN Big Mac Index

  12. Formula: #2 To determine if Currency is overvalued or undervalued against US Dollar (PPP-Exchange Rate) X 100 Exchange Rate Making Your OWN Big Mac Index

  13. 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 fromBig Mac Index?

  14. Implications for Foreign Trade: Can US sell to other nations easily if their currencies are: Undervalued? Overvalued? What can be learned from Big Mac Index?

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

  16. 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

  17. 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 Big Mac Index

  18. Burgernomics!

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