The Big Mac Index ( Mac )

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Big Mac Index Introduction The Big Mac Index (also known as Big Mac PPP), used as a guide to whether currencies are at their “correct” level, was invented by The Economist in 1986. Local-currency prices of the burger are converted into dollar prices at the current exchange rate for purposes of the comparison. PPP theory serves as the basis of the Big Mac Index, suggests that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, burger) in any two countries. (D.H, 2014)If the burger costs significantly more in a given country than it does in the United States, that country’s currency is overvalued, then it is likely to depreciate in the future,…show more content…
(D.H, 2014) (See appendix a&b)Although the statistic reflects a sizable over/undervaluation of the managed value of the foreign currency versus the dollar, the theory of purchasing power parity is supposed to indicate where the value of currencies should go over the long-term instead of its value today. (Moffett, 2012) Overall, the Big Mac Index reveals that currencies are particularly overvalued in Norway, Switzerland and Brazil, while currencies in much of the emerging world, including Russia, China and India, are cheap compared to the dollar. Although it is argued that expect average prices to be cheaper in poor countries than in rich ones because labor costs are lower, and PPP signals where exchange rates should head over in the long run, country like China becomes richer, not where prices should be right now. (See appendix f) Limitation: Short Run and Long Run The idea of the exchange rate prediction is that the prices will equalize over time. However, practicality says many limitations exist in the short and long term for measuring evaluations and achieving successful trades. Research shows that short-term durations will never achieve parity because price will be hard to equalize prices in the short length of time. Longer terms may see deviations in prices last for many years without a guaranteed means of achieving real parity. That is because some nations undervalue their currency

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