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  • The Big Mac Index

    The newest high powered tool in an economists arsenal.

    BIG MAC INDEX

    Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
    Here is an example of a Big Mac Index:

    http://www.oanda.com/products/bigmac/bigmac.shtml

  • #2
    Originally posted by Priest
    The newest high powered tool in an economists arsenal.

    BIG MAC INDEX

    Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
    Here is an example of a Big Mac Index:

    http://www.oanda.com/products/bigmac/bigmac.shtml
    I,m no economist but how does that work when the price to produce a big mac is different in each country? This could be due to wages supply of products etc so evaluating currencies on the price of a big mac cant be accurate, can it?

    then you have to take into account supply and demand affects on price.

    Although, in foriegn countries it is a easy (but rough) way to judge a nations wealth. When i lived in Trinidad the price of a big mac was around $18tt and the exchange rate was $1US per $6.2 TT. So a big mac was more expensive there, but the basic wage, what majority of workers are on, is $7 tt.

    For $7tt i could nearly feed myself for a day on street vendor food which was very nutrituos containing meat, legumes, vegetables, and flour and was top rate tasting food made from fresh ingredients. Yet there would still be people coffing up over 3 hours pay just to eat the crap they sell at mcdonalds
    Last edited by Temujin; 20 Apr 04, 05:41.
    Not lip service, nor obsequious homage to superiors, nor servile observance of forms and customs...the Australian army is proof that individualism is the best and not the worst foundation upon which to build up collective discipline - General Monash

    Comment


    • #3
      I totally have to agree with Temujin here, this index may be funny but it has nothing really to do with how to evaluate the economic situation of a country.
      I mean over here I have to pay roughly 3€ and what does that mean now???
      "A platoon of Chinese tanks viciously attacked a Soviet harvester,
      which was peacefully working a field near the Soviet-Chinese border.
      The harvester returned fire and upon destroying the enemy
      returned to its home base."

      Comment


      • #4
        In fact it is a campaign sponsored by MC Donald and the American government, to pretend by propaganda that the American culture is universal and that if you can’t use a Big Mac to measure and compare yourself to other countries, you are an old and marginal country, you are a loser .

        Vive la French baguette !
        LaPalice.
        Monsieur de La Palice est mort
        Mort devant Pavie.
        Un quart d'heure avant sa mort
        Il était encore en vie...

        Comment


        • #5
          Originally posted by LaPalice
          In fact it is a campaign sponsored by MC Donald and the American government, to pretend by propaganda that the American culture is universal and that if you can’t use a Big Mac to measure and compare yourself to other countries, you are an old and marginal country, you are a loser .

          Vive la French baguette !
          LaPalice.
          Seems very plausible. Look out for the next installment Meat Pienomics Australia's attempt to culturally dominate the world
          Not lip service, nor obsequious homage to superiors, nor servile observance of forms and customs...the Australian army is proof that individualism is the best and not the worst foundation upon which to build up collective discipline - General Monash

          Comment


          • #6
            Originally posted by LaPalice
            Vive la French baguette !
            LaPalice.

            And what about Kraut and Bratwurst???

            Well, Bratwurst is also good with a Baguette but else? Hmm, maybe with tomatoes and cheese...
            "A platoon of Chinese tanks viciously attacked a Soviet harvester,
            which was peacefully working a field near the Soviet-Chinese border.
            The harvester returned fire and upon destroying the enemy
            returned to its home base."

            Comment


            • #7
              Originally posted by Temujin
              I,m no economist but how does that work when the price to produce a big mac is different in each country? This could be due to wages supply of products etc so evaluating currencies on the price of a big mac cant be accurate, can it?
              All good points, which unfortunately miss the point of the Big Mac index.

              The index (as presented by The Economist Magazine, who I believe came up with the idea and first presented it) is meant to compare the relative value (i.e. purchasing power) of the currencies of various countries. This is done by comparing what it costs in various currencies to purchase the same basket of market items (i.e. a BigMac). This is then compared to the currency exchange rate between those currencies and US$ to get some idea if a currency is over or under valued in relation to US$.

              It was initially presented as a light-hearted funny index sort of thing making light fun of the way American culture has invaded most of the rest of the world. The interesting thing is that it actually did a pretty fair job (at least as good as most of the "serious" measures) of estimating just how under/over valued a currency was with respect to the US$, and hence, the future movements of that currency with respect to US$ in currency markets.

              Of course, the underlying assumption is that the folks selling Big Macs in other countries are doing it at roughly the same sort of profit margins that MickyD's in the US are running at. That would incorporate the local variations in the costs of doing business i.e. labor, materials, real estate, etc...

              Go figure....
              Last edited by Jazz; 20 Apr 04, 10:48.

              Comment


              • #8
                The Bastards! They stole the idea from me! I invented, and have been using, the Pizza Index for years (and my good Hungarian friend, Laszlo, better not try to claim otherwise...).

                That is justifying capital outlays, dependent on the relative worth of the item to be purchased, as compared to a large thin crust, combination pizza, from Round Table Pizza. Of course, slight seasonal variations can be expected to influence the model, such as whether, or not, coupons are available and the nature of those discounts.

                So...for example, you might compare the cost of three discounted pizzas (average $17 each) to the cost of a new computer game software title at 49.95, plus tax. Given that dependent upon how soon the pizzas are consumed, whether they are all purchased at the same time (and thus increasing the probability of at least one of them going stale in the fridge), and the overall net caloric effect on my already fat ass, the overall health, and fiscal effect is pretty much the same as an average software title that might keep me occupied a few days, and deprive me from the proper amount of exercise.

                Some software titles pretty much suck, and the money spent on them is wasted - just like when the pizzas get delivered and the buffoon that was tasked with driving the three blocks to your home got lost and they are cold, and dropped them, with the cheese and toppings all skewed to one side. Or, you leave the leftovers in the fridge too long and lose interest, thus wasting half of your money. You can see the obvious parallels.

                Given the proper extrapolation to larger capital outlays, this model can be used to evaluate purchases for car repairs, hardware (how many pizzas is that new video card worth?), et cetera.

                I think I should sue...
                I have no problem at all with being proved wrong. Especially when being proved wrong leaves the world a better place, than being proved right...

                Comment


                • #9
                  Originally posted by Jazz
                  All good points, which unfortunately miss the point of the Big Mac index.

                  The index (as presented by The Economist Magazine, who I believe came up with the idea and first presented it) is meant to compare the relative value (i.e. purchasing power) of the currencies of various countries. This is done by comparing what it costs in various currencies to purchase the same basket of market items (i.e. a BigMac). This is then compared to the currency exchange rate between those currencies and US$ to get some idea if a currency is over or under valued in relation to US$.

                  It was initially presented as a light-hearted funny index sort of thing making light fun of the way American culture has invaded most of the rest of the world. The interesting thing is that it actually did a pretty fair job (at least as good as most of the "serious" measures) of estimating just how under/over valued a currency was with respect to the US$, and hence, the future movements of that currency with respect to US$ in currency markets.

                  Go figure....

                  The cost of production is different at the same time. The goal of the study is to find how much over or undervalued a currency is compared to US. Is the aim of this to guide currency speculators what to buy?

                  What if a currency is is not based on agriculture and food production but say oil and minerals, the cost of the burger may be high compared to a country with plenty of food resources however their currencies are the same compared to the US. Wouldn't that give a false assessment of a currency?
                  Not lip service, nor obsequious homage to superiors, nor servile observance of forms and customs...the Australian army is proof that individualism is the best and not the worst foundation upon which to build up collective discipline - General Monash

                  Comment


                  • #10
                    Originally posted by Temujin
                    The cost of production is different at the same time. The goal of the study is to find how much over or undervalued a currency is compared to US. Is the aim of this to guide currency speculators what to buy?

                    What if a currency is is not based on agriculture and food production but say oil and minerals, the cost of the burger may be high compared to a country with plenty of food resources however their currencies are the same compared to the US. Wouldn't that give a false assessment of a currency?
                    Well, initially, it was intended as a joke..... I don't think that anybody seriously expected it to "work".

                    The thing is, it has worked in predicting movements in currency markets. Merely a tool for currency speculators? Maybe. A joke that hits close to a nerve? Yeah, probably.

                    Theoretically, your questions as to the value of the BigMac Index are valid. Empirical evidence seems to indicate that they are not that important when one is talking about the relative valuation of a currency with respect to the US$. Data and results talk.

                    I'd imagine that the index is best a predicting the currency market behavior of currencies of countries with that play on the same field economically as the US. In other words, countries with substantial manufacturing and/or technology and/or financial sectors in their economies.

                    Not that other countries economies are not important, especially to their citizens. It's just that they play on a different field.

                    Comment


                    • #11
                      Jazz is correct about the big mac index, started in 1986 by the Economist magazine (a British publication) the index has proven to be very accurate over the years. Given that big macs are sold in 120 countries and that both the recipe and pricing policy for them have been standardized worldwide it makes them a little better than say cheese or bread or milk etc...

                      Comment


                      • #12
                        Originally posted by JAMiAM
                        The Bastards! They stole the idea from me! I invented, and have been using, the Pizza Index for years (and my good Hungarian friend, Laszlo, better not try to claim otherwise...).

                        That is justifying capital outlays, dependent on the relative worth of the item to be purchased, as compared to a large thin crust, combination pizza, from Round Table Pizza. Of course, slight seasonal variations can be expected to influence the model, such as whether, or not, coupons are available and the nature of those discounts.

                        So...for example, you might compare the cost of three discounted pizzas (average $17 each) to the cost of a new computer game software title at 49.95, plus tax. Given that dependent upon how soon the pizzas are consumed, whether they are all purchased at the same time (and thus increasing the probability of at least one of them going stale in the fridge), and the overall net caloric effect on my already fat ass, the overall health, and fiscal effect is pretty much the same as an average software title that might keep me occupied a few days, and deprive me from the proper amount of exercise.

                        Some software titles pretty much suck, and the money spent on them is wasted - just like when the pizzas get delivered and the buffoon that was tasked with driving the three blocks to your home got lost and they are cold, and dropped them, with the cheese and toppings all skewed to one side. Or, you leave the leftovers in the fridge too long and lose interest, thus wasting half of your money. You can see the obvious parallels.

                        Given the proper extrapolation to larger capital outlays, this model can be used to evaluate purchases for car repairs, hardware (how many pizzas is that new video card worth?), et cetera.

                        I think I should sue...
                        pizza is mine
                        a brain cell

                        Comment


                        • #13
                          Originally posted by JAMiAM

                          So...for example, you might compare the cost of three discounted pizzas (average $17 each) to the cost of a new computer game software title at 49.95, plus tax.
                          I think I should sue...
                          Discounted pizza costs $5 here, call it $4US roughly. My god we must be filthy rich over here.

                          Actually i take that back the quality of the cheapo pizza is shocking, i stopped eating them my missus makes the best pizza's
                          Not lip service, nor obsequious homage to superiors, nor servile observance of forms and customs...the Australian army is proof that individualism is the best and not the worst foundation upon which to build up collective discipline - General Monash

                          Comment


                          • #14
                            Originally posted by Jazz
                            Well, initially, it was intended as a joke..... I don't think that anybody seriously expected it to "work".

                            The thing is, it has worked in predicting movements in currency markets. Merely a tool for currency speculators? Maybe. A joke that hits close to a nerve? Yeah, probably.

                            Theoretically, your questions as to the value of the BigMac Index are valid. Empirical evidence seems to indicate that they are not that important when one is talking about the relative valuation of a currency with respect to the US$. Data and results talk.

                            I'd imagine that the index is best a predicting the currency market behavior of currencies of countries with that play on the same field economically as the US. In other words, countries with substantial manufacturing and/or technology and/or financial sectors in their economies.

                            Not that other countries economies are not important, especially to their citizens. It's just that they play on a different field.

                            Yeah i realise the lightheartedness of it all, all i can say is if this is an example of how currency speculators make their decisions, burger or not, then i can see how they can stuff up so often. One of our national banks lost NAB lost something like four hundred million $AU on speculating, although the story goes a bit deaper than that i think.
                            Not lip service, nor obsequious homage to superiors, nor servile observance of forms and customs...the Australian army is proof that individualism is the best and not the worst foundation upon which to build up collective discipline - General Monash

                            Comment


                            • #15
                              I'd like to apply for the position of auditor in the Beeronomics Index
                              Now listening too;
                              - Russell Robertson, ruining whatever credibility my football team once had.

                              Comment

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