Economy Shock

Shocking!!

The Economist’s Big Mac index seeks to make exchange-rate theory more digestible. It is arguably the world’s most accurate financial indicator to be based on a fast-food item. (Here is a brief explanation and video clip.)

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.

THE size of your pay packet may be important, but so is its purchasing power. Helpfully, a UBS report published this week offers a handy guide to how long it takes a worker on the average net wage to earn the price of a Big Mac in 73 cities. Fast-food junkies are best off in Chicago, Toronto and Tokyo, where it takes a mere 12 minutes at work to afford a Big Mac. By contrast, employees must toil for over two hours to earn enough for a burger fix in Mexico City, Jakarta and Nairobi.

MB: The Big Mac Index in theory may work, but can anyone share some possible disadvantages of using the Big Mac Index? In addition what are some of the advantages, why would someone come up with the idea to use a fast food item as a financial indicator?  Thoughts appreciated, thank you.

Popularity: 26%