A number of years ago, The Economist magazine began its influential Big Mac Index and it has been used ever since to discuss foreign exchange rates.
Today we’ll look at the cost of the Big Mac around the world and a simple way to get money to pay for it.
Foreign Exchange Rates And The Big Mac Index
Let’s start with the Index itself, as described by The Economist:
The Big Mac Index was invented by The Economist in 1986 as a light-hearted guide to whether currencies are at their “correct” level.
It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.
For example, the average price of a Big Mac in America in July 2013 was $4.56; in China it was only $2.61 at market exchange rates. So the “raw” Big Mac index says that the Yuan was undervalued by 43% at that time.
The Big Mac Index includes a raw version and an adjusted version. The adjusted Index was designed to allow for the expectation that poorer countries would have lower burger prices due their lower labour costs.
Of course, there is plenty of debate about the Big Mac Index. Some people have raised the issue of cultural differences – one country may see McDonald’s cheap fast food while others may see it as ‘Western-style fine dining.’
On the amusing side, there have been claims that some national governments have actually controlled the price of Big Macs in their country to avoid being embarrassed by the Index.
Nonetheless, let’s look at what the Index has to say . . .
As at July 2013, the adjusted Big Mac Index showed the top 5 most expensive Big Mac countries being:
The lowest were:
1. Hong Kong
3. South Africa
Example – How To Get The Best Exchange Rate To Pay For Your Burgers
Here’s a quick example for you to consider . . .
You could be from anywhere but let’s imagine that you are from the UK and have decided to live in Australia for a year with three friends.
Let’s also assume that you and your friends are going to eat a Big Mac for lunch every day (you might want to order some salad with that).
According the currency-adjusted Big Mac Index, one Big Mac in Australia will cost you $5.04.
So, if you and your friends are going to be eating 1,460 Big Macs for the year between the four of you, then you’re going to need $7,358.40 Australian dollars to pay for them.
Some people might stop here and simply try to send the $7,358.40 by using their local UK bank.
They would lose money. Instead, the smart ones use CurrencyFair to transfer money to Australia.
With a bank, you would need to pay GBP £4,398.96 to receive your AUD $7,358.40.This is what would happen . . .
In contrast, with CurrencyFair, you would only need GBP £4,268.13 to receive the same AUD $7,358.40.
Just by sitting at your computer and sending your money by CurrencyFair, you would now have an extra GBP £130.83 to spend on even more burgers.
And, like we said earlier, you might want to order some salad with that.
This post was approved by Brett Meyers, CEO of CurrencyFair. Come visit us now on Google+