1. Burgernomics! The Big Mac Index NERC March 13, 2006 Judy Heine
Retired, Canton (MA) &
MA Council on Econ Ed

2. The Big Mac Index or “Burgernomics”

3. The Big Mac Index or “Burgernomics”
Created by ‘The Economist’
in 1986
Tracks 20 yrs of data
Published Quarterly!

4. * Big Mac has same recipe (ingredients) in 120 countries
The Big Mac Index
* Big Mac has same recipe (ingredients) in
120 countries
* So, Big Mac SHOULD cost same in each country,
but it Doesn’t!!

5. The Big Mac Index
* Based on notion that a dollar should buy the same
amount in all countries
(Purchasing Power Parity or PPP)
* In the long run, exchange rates between two currencies
should move towards the rate that equals the price of
an identical basket of goods & services in each
country

6. Big Mac Index
Purchasing Power Parity (PPP) is a measure of the relative purchasing power of different currencies.
PPP is measured by the price of the same goods in different countries, compared to the product in the ‘base currency’
Big Mac Index compares Big Mac prices in US Dollars to price in other nations

7. Big Mac Index Visual display created quarterly by The Economist
Comparing, over time, shows changes in strength of currencies

8. Big Mac Index Currency values fluctuate daily
Measures one currency in relation to another
Can compare price of Big Mac in another nation to that in USA!

9. Big Mac Index
Comparing a currency’s actual exchange rate with its PPP is one test of whether the currency is undervalued or overvalued.

10. Big Mac Index Is other nation’s currency: * OVERVALUED?
Costs MORE to buy Big Mac than in USA or
* UNDERVALUED?
Costs LESS to buy Big Mac than in USA

11. Making Your OWN Big Mac Index
Formula: #1 Derive PPP
Foreign Price = PPP
US Price

12. Making Your OWN Big Mac Index
Formula: #2
To determine if Currency is overvalued or undervalued against US Dollar
(PPP-Exchange Rate) X 100
Exchange Rate

13. What can be learned from Big Mac Index?
Emerging nations have weak currencies
Expensive for them to buy from nations with strong currencies
Expensive for US to buy from nations with overvalued currency

14. What can be learned from Big Mac Index?
Implications for Foreign Trade:
Can US sell to other nations easily if their currencies are:
Undervalued?
Overvalued?

15. The Big Mac Index (or “Burgernomics”)
seeks to make Exchange Rate theory
more “Digestable.”

16. Big Mac Index May be ‘hard to swallow’ for some
PPP holds true in long-run even if:
--- local prices distorted by trade
--- barriers on beef
--- sales taxes or difference
in property rents!

17. Big Mac Index
Doesn’t compare real purchasing power of currencies around the world!
USB has created another index that aims to measure well-being by estimating # minutes workers in various countries must toil to buy a Big Mac
EX: Kenya = 3 hours
USA = 10 minutes!
Differences reflect variations in productivity and disparity in cost of ingredients

18. Burgernomics!