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. Click here to watch a video on a cheap way to get the best foreign exchange rates.
Foreign Exchange Rates And The Big Mac IndexLet’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: 1. Brazil 2. Colombia 3. Turkey 4. Argentina 5. Peru The lowest were: 1. Hong Kong 2. India 3. South Africa 4. Japan 5. Malaysia