The basic idea of the index is that a Big Mac should cost about the same in any country. The Big Mac Index is not a perfect PPP (Purchasing Power Parity) measure because it only considers one commodity and does not take into account other aspects such as housing, transportation, and health care. But it gives a general idea of the relative affordability of goods and services in different countries.
Where did it all begin?
In 1986, The Economist came up with a simple way to measure the value of currencies around the world. They compared the price of a Big Mac at McDonald’s and came up with their purchasing power index.
Why this particular burger?
The same ingredients (buns, meat, vegetables, sauces, etc.) are used to make the “sandwich”, which allows you to compare the prices of these simple products in different countries. “Simulating” at the same time the food basket consumed by the population.
Big Mac is sold in many countries around the world and has a strict recipe, weight, size.
It is worth clarifying that the figure is not among the official ones, but it is known practically all over the world. It would seem that a joke idea eventually turned into a good economic indicator.
How the Big Mac Index is calculated
To calculate the Big Mac Index, The Economist collects data on the cost of a Big Mac in different countries around the world. They then use this data to calculate exchange rate ratios.
So, the calculation of the Big Mac Index is done as follows:
Big Mac Index = (Big Mac Price in Country A) / (Big Mac Price in the US) * 100
It looks scary and confusing, but after the example, everything will become clearer.
Example calculation
A Big Mac costs 22.90 reais in Brazil and US$5.58 in the United States. The implied exchange rate is 4.10. The difference between this and the actual exchange rate, 4.76, suggests the Brazilian real is 13.7% undervalued.
In July 2022, The Economist updated the Big Mac index, now using the U.S. price provided by McDonald’s itself. The methodology for calculating the GDP-adjusted index has also been changed, the full story of which will now be adjusted with each GDP update from the IMF. Both versions of the calculation are available for analysis.
Connection with cryptocurrenciesÂ
There is no link between the Big Mac index and cryptocurrencies yet. However, some analysts believe that cryptocurrencies could soon have an impact on the index. As they are able to make international trade cheaper. This can lead to an increase in trade volumes between countries and affect the prices of goods and services.
Another factor is that cryptocurrencies could become a popular means of payment for these goods and services. Which will increase the demand for cryptocurrencies and could affect prices.
Currently, cryptocurrencies have no impact on the Big Mac Index. But if the popularity of cryptocurrencies continues to grow, they may have a greater impact on this index in the future.
Incidentally, in October, transaction fees on the Bitcoin network rose to an average of 0.00017510 BTC ($6.08) and surpassed the price of Big Mac.
The index’s impact on the economy
“Burgernomics” was never intended to be an accurate measure of currency misalignment, but merely a tool to make the theory of exchange rates more understandable. Nevertheless, the Big Mac Index has become a global standard, entered several economics textbooks, and has been the subject of dozens of academic studies. For those who take fast food more seriously, The Economist also calculates a gourmet version of the index.
Conclusion
The Big Mac Index is an interesting and easy way to compare the value of currencies of different countries. However, it has a number of limitations that should be considered when using it. Nevertheless, the Big Mac Index is a very interesting comparative tool.
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