The Big Mac Index
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The most recent Big Mac Index can be found at the following web address: http://www.economist.com/market/bigmac/index.cfm.
Incorporate answers to the following questions in a well crafted essay response including supporting evidence for the discussion. (APA format)
1) Briefly discuss the history and purpose of the big Mac Index. where is it most expensive to buy a big Mac? where is it least expensive to buy a big Mac?
2) What factors other than currency overvaluation and undervaluation might contribute to these differences?
3) Based on the theory of purchasing power parity, what is likely to happen to these currencies against the dollar in the next few years?
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Solution Summary
This solution discusses the history, purpose changes and variation between countries of the Big Mac Index in approximately 1000 words with seven APA references.
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History and purpose of the Big Mac Index:
The Big Mac Index is an index published yearly by The Economist magazine how different world currencies vary in fair value. Developed in 1986 as a light hearted way to measure deviations in the ability of world currencies to purchase a McDonald's Big Mac, the index is based on purchasing power parity (PPP) theory where it seeks to determine the purchasing power parity in the a hundred and twenty countries in which Big Mac is sold (The Economist, 2012a).
The yardstick used in this index is the price of the Big Mac burger in one country, usually the United States, relative to the price of big Mac in another country in order to determine how far the U.S. dollar stretches from country to country. The Big Mac was used as the basket of goods to measure the value of the currencies as it is not available in about 120 countries, but has certain specifications within a specific market where McDonald's franchisees are the ones who negotiate input prices and develop a taste for the Big Mac that aligns with the local market. In essence therefore, it allows effective comparison between countries (Economist.com Opinion, 2002). In calculating the Big Mac index between two countries, the price of a Big Mac in one country is divided by its price in another country in their original currencies. The index is then compared with the actual current exchange rates ...
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