The Big Mac Index

The Palm Beach Post looks at the Big Mac Index which gauges how much a Big Mac costs in different countries around the world. The Economist has been tracking the Big Mac Index since 1986.
The idea behind the index is that you can tell how a strong or a weak a country’s currency truly is by looking at how much the massive McDonald’s (MCD) hamburger costs. As it turns out, the cost varies a lot by country.
In the United States, the average price for a Big Mac is $3.58. In China, however, which is often criticized for manipulating its currency, a Big Mac goes for the equivalent of $1.83. That’s nearly half of what it costs here. In Norway, a Big Mac will set you back $6.87.
So is there any value to the Big Mac Index? Apparently, there is:

While the Big Mac Index is a novel way to look at what a dollar buys from one country to the next, it also has proved strikingly accurate at foreshadowing changes in currency, University of Florida Professor Dave Denslow said.
“If the Big Mac Index says that a currency is undervalued, it tends to appreciate,” Denslow said.
That’s exactly what happened with the Chinese currency, though pressure from U.S. and European governments probably weighed more heavily of the minds of Chinese officials than the word of a British business publication.
Last month, just days before the G-20 Summit, China announced that it will revalue the yuan.

Posted by Eddy Elfenbein on July 12th, 2010 at 8:51 am

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