BIG MAC INDEX
WHAT IS A BIG MAC INDEX?
The big Mac index is a theory dealing with PPP purchase power parity. The big Mac index was created by the Economist based on the Purchase Power theory, the first step understands what the Purchase power theory is. Here is a brief example to better understand the purchase power theory; suppose that one US dollar is currently in the market for ten Argentinean pesos. In the United States a soccer ball costs $40 while in Argentina they sell the same soccer ball at 150 pesos. Since 1 US dollar is the same to 10 pesos, the soccer ball that in United States you could buy for $40 bucks and 15 pesos if we buy it in Argentina. There’s an advantage of buying the soccer ball in Argentina this will bring some upsets to the soccer ball market in the US. Getting back to the big Mac index it is easier to understand now. The theory points that the exchange rate between one currency to another will balance when they purchase power parity are equivalent. In other words goods in United States and in Panama should cost the same taking in consideration the exchange rate. WHAT IS THE UNDERLYING THEORETICAL CONCEPT?
There are some points to have in consideration to see the theoretical part of the Big Mac index. First let’s remember it was created by The Economist based on the PPP purchasing power parity which we already saw by definition and a brief example. The second point is how easy we can get the results in the big Mac index to analyze them right away. Is just matter of dividing the price of a big Mac in any given country by the price of big Mac in another country in their respective local currencies. This data that you obtain from the big Mac index economist can use for different purposes such as determining how is inflation behaving or how the currency is valued at a certain stage. WHY DO ECONOMISTS AND POLITICIANS AROUND THE GLOBE USE THIS INDEX SO WIDELY? Here is an example I found of a country that has being having more downs...
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