Big Mac Index IT SEEKS TO MAKE EXCHANGE -RATE THEORY A BIT MORE DIGESTIBLE
Content: üDefinition üHistory ü How to count üVariants üLimitations
Definition Big Mac Index – informal way of measuring the purchasing power parity (PPP) between two currencies PPP method means: the rate between two currencies should naturally adjust so that a sample basket of goods and services should cost the same in both currencies
History The Big Mac Index was introduced in The Economist in September 1986 by Pam Woodall
How to count: BMI= Big Mac price in one country Big Mac price in another country Compare with actual exchange rate
Example: in July 2008 the price of a Big Mac was : $ 3. 57 £ 2. 29 in the US in the UK an actual exchange rate $2. 00 to £ 1 $3. 57/£ 2. 29 = 1. 56 [(1. 56 -2. 00)/2. 00]*100= -22% the pound was overvalued against the dollar by 22%
Variants: 1. A Tall Latte index 2. i. Pod index 3. Billy index
Limitations: Mc. Donald's is relatively expensive in comparison to eating at a local restaurant Social status of eating at fast food restaurants like Mc. Donald's, local taxes, levels of competition, and import duties on selected items may not be representative of the country's economy as a whole The Big Mac vary from country to country
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