The Big Mac Index.ppt

8/17/2019 The Big Mac Index.ppt

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Burgernomics

• U.S. dollar/Mexican peso exchange rate is 1/15 pesos.• Big Mac in the U.S. is $3, the price of a Big Mac in Mexico

ould !e "5 pesos assuming the countries ha#epurchasing poer parit.

• %f, hoe#er, the price of a Big Mac in Mexico is &' pesos,Mexican fast(food shop oners could !u Big Macs in theU.S. for $3, at a cost of "5 pesos, and sell each in Mexicofor &' pesos, ma)ing a 15(peso ris)(free gain.

• *o exploit this ar!itrage, the demand for U.S. Big Macs

ould dri#e the U.S. Big Mac price up to $", at hich pointthe Mexican fast(food shop oners ould ha#e no ris)(freegain. *his is !ecause it ould cost them &' pesos to !uU.S. Big Macs, hich is the same price as in Mexico + thusrestoring .


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Burgernomics

• %n the example a!o#e, here the Big Mac isat a price of $3 and &' pesos, a exchange rate of US$1 to -' pesos isimplied.

• *he peso is o#er#alued against the U.S.dollar ! 33 as per the calculation0 -'(15/15

• *he dollar is under#alued against the peso! -5 as per the calculation0 '.'5('.'&2/'.'&2.


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*he Big Mac %ndex or

Burgernomics4•reated ! ‘The Economist 6 in 178&

• *rac)s -' ears of data

• u!lished 9uarterl:


4/12


Burgernomics4• Big Mac has same recipe ingredients in

1-' countries.

• So, Big Mac S; cost same in each

countr, !ut it >oesn6t::


5/12


Burgernomics4• Based on notion that a dollar should !u the

same amount in all countries

urchasing oer arit or .

• %n the long run, exchange rates !eteen to

currencies should mo#e toards the rate that

e?uals the price of an identical !as)et of

goods @ ser#ices in each countr.


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Burgernomics4• urchasing oer arit is a measure of

the relati#e purchasing poer of diAerent

currencies.

• is measured ! the price of the same

goods in diAerent countries, compared to the

product in the !ase currenc6

• Big Mac %ndex compares Big Mac prices in US

>ollars to price in other nations


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Burgernomics4• omparing a currenc6s actual exchange rate

ith its is one test of hether the currenc

is under#alued or o#er#alued.

• %s other nation6s currenc0

C H

Costs MORE to buy Big Mac than in USACosts MORE to buy Big Mac than in USA orC UI>EFDG=UE>H

Costs LESS to buy Big Mac than in USACosts LESS to buy Big Mac than in USA


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Ma)ing Jour OWN Big Mac %ndex


Burgernomics4


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Ma)ing Jour OWN Big Mac %ndex


Burgernomics4


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Burgernomics4• Ma !e hard to digest6 (

local prices distorted ! taxes DG*, tariA

*ransport osts

!arriers on meat

sales taxes or diAerence in propert rents:

ompetiton or lac) of it


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Burgernomics4


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Burgernomics4

Documents

The Big Mac Index.ppt