Big Mac Index
Big Mac Index The McDonald’s corporation – “McDonald 's is the leading global food-service retailer with more than 34,000 local restaurants serving nearly 69 million people in 118 countries each day” (McDonalds Corporation, 2014). The statistics alone are impressive for a company that started as a single restaurant in Des Plaines, IA in April, 1955 (McDonalds Corporation, 2014). Even more impressive is the influence McDonald’s has on global economic forecasting by virtue of its signature sandwich – the Big Mac.
The Big Mac is synonymous American culture and in “1986 the British periodical The Economist has used the price of the Big Mac to estimate the exchange rate between the dollar and other currency” (Daniels et al., 2011, p. 373). The basic premise behind the Big Mac index is to “measure purchasing power parity” (The Economist, 2014). The index hypothesizes a set value for a basket of items and compares the cost for the basket against different currencies. The Big Mac index uses the McDonalds Big Mac as the basket item and the dollar as the stable currency. By comparing the cost of a Big Mac in the United States to the cost of a Big Mac in other counties, The Economist suggests what the exchange rates should be around the globe (Daniels et al., 2011). As of July 11, 2013 the most expensive country to purchase a Big Mac was Norway (The Economist, 2014). The cost of the Big Mac in Norway converted to dollars was $7.61 or Kroner 46.00. The Big Mac index suggested the Kroner was overvalued by 64% and that the actual rate of exchange was K-6.13 to1 USD (The Economist, 2014). The least expensive country to purchase a Big Mac was India. The Cost of the Big Mac in India was the equivalent of $1.50 or Rupee 90.00. The Big Mac index suggested the Rupee was undervalued by 67.1% and that the actual rate of exchange was R-59.98 to 1 USD.
The Big Mac index may provide a starting point when determining currency valuation (over or under) but is not
The Big Mac is synonymous American culture and in “1986 the British periodical The Economist has used the price of the Big Mac to estimate the exchange rate between the dollar and other currency” (Daniels et al., 2011, p. 373). The basic premise behind the Big Mac index is to “measure purchasing power parity” (The Economist, 2014). The index hypothesizes a set value for a basket of items and compares the cost for the basket against different currencies. The Big Mac index uses the McDonalds Big Mac as the basket item and the dollar as the stable currency. By comparing the cost of a Big Mac in the United States to the cost of a Big Mac in other counties, The Economist suggests what the exchange rates should be around the globe (Daniels et al., 2011). As of July 11, 2013 the most expensive country to purchase a Big Mac was Norway (The Economist, 2014). The cost of the Big Mac in Norway converted to dollars was $7.61 or Kroner 46.00. The Big Mac index suggested the Kroner was overvalued by 64% and that the actual rate of exchange was K-6.13 to1 USD (The Economist, 2014). The least expensive country to purchase a Big Mac was India. The Cost of the Big Mac in India was the equivalent of $1.50 or Rupee 90.00. The Big Mac index suggested the Rupee was undervalued by 67.1% and that the actual rate of exchange was R-59.98 to 1 USD.
The Big Mac index may provide a starting point when determining currency valuation (over or under) but is not
References: Daniels, J., Radebaugh, L., Sullivan, D. (2011). International Business (13th ed.). Upper Saddle River, NJ: Pearson Education, Inc The Economist. (2014). The Big Mac Index. Retrieved from http://www.economist.com/content/big-mac-index McDonald’s Corporation. (2014). Getting to Know Us. Retrieved from http://www.aboutmcdonalds.com/mcd/our_company.html