Big Mac Index
MINISTRY OF EDUCATION REPUBLIC OF MOLDOVA
INTERNATIONAL LIBERAL UNIVERSITY OF MOLDOVA FACULTY OF ECONOMICAL SCIENCE
Big Mac Currencies (The 2002 Big Mac Index)
Foundation of Economics
Economics Efficiency
International Investments
Presentation Paper
October 19, 2012
Chisinau 2012
Foundation of Economics
THE BIG MAC index
The Big Mac is the world’s most popular sandwich, was created in 1968 by a McDonald’s franchise in Pittsburgh, Pennsylvania. While most people see the Big Mac as a sandwich, economists also see that as a consumer good which is sold at over 25,000 McDonald’s restaurants in 120 countries around the world. Because of its popularity, the Big Mac allows economists to make (admittedly unscientific) comparisons of exchange rates and relative prices in countries around the globe. This Economics Minute looks at how the "Big Mac Index" helps explain variation in exchange rates and prices.
In 1972, just before the collapse of the Bretton–Woods system of fixed exchange rates, the US dollar cost about 40 British pence. By 1985, the dollar had appreciated to 90 pence, but by the end of December 2008, it had fallen back to 67 pence. As such substantial changes in currency values over the longer term are commonplace in a world of floating exchange rates, the understanding of the valuation of currencies is a significant intellectual challenge and of great importance for economic policy, the smooth functioning of financial markets, and the financial management of many international companies.
While exchange-rate economics is a controversial area, a substantial body of research now finds that over the longer term exchange rates are ‘anchored’ by price levels. This idea is embodied in purchasing power parity (PPP) theory, which states that the exchange rate is proportional to the ratio of price levels in the two countries. A new and simple way of making PPP comparisons was
INTERNATIONAL LIBERAL UNIVERSITY OF MOLDOVA FACULTY OF ECONOMICAL SCIENCE
Big Mac Currencies (The 2002 Big Mac Index)
Foundation of Economics
Economics Efficiency
International Investments
Presentation Paper
October 19, 2012
Chisinau 2012
Foundation of Economics
THE BIG MAC index
The Big Mac is the world’s most popular sandwich, was created in 1968 by a McDonald’s franchise in Pittsburgh, Pennsylvania. While most people see the Big Mac as a sandwich, economists also see that as a consumer good which is sold at over 25,000 McDonald’s restaurants in 120 countries around the world. Because of its popularity, the Big Mac allows economists to make (admittedly unscientific) comparisons of exchange rates and relative prices in countries around the globe. This Economics Minute looks at how the "Big Mac Index" helps explain variation in exchange rates and prices.
In 1972, just before the collapse of the Bretton–Woods system of fixed exchange rates, the US dollar cost about 40 British pence. By 1985, the dollar had appreciated to 90 pence, but by the end of December 2008, it had fallen back to 67 pence. As such substantial changes in currency values over the longer term are commonplace in a world of floating exchange rates, the understanding of the valuation of currencies is a significant intellectual challenge and of great importance for economic policy, the smooth functioning of financial markets, and the financial management of many international companies.
While exchange-rate economics is a controversial area, a substantial body of research now finds that over the longer term exchange rates are ‘anchored’ by price levels. This idea is embodied in purchasing power parity (PPP) theory, which states that the exchange rate is proportional to the ratio of price levels in the two countries. A new and simple way of making PPP comparisons was
Bibliography: 1. http://www.econedlink.org/lessons/index.php?lid=156&type=student 2. http://en.wikipedia.org/wiki/Big_Mac_Index 3. http://onlinelibrary.wiley.com/doi/10.1002/ijfe.432/full 4. http://www.economist.com/node/581914 5. http://www.investopedia.com/terms/b/burgernomics.asp#axzz29fr8M8Pp 6. http://www.economist.com/blogs/graphicdetail/2012/07/daily-chart-17 7. http://www3.pids.gov.ph/ris/eid/pidseid0902.pdf 8. http://www.investopedia.com/terms/e/economic_efficiency.asp#axzz29fr8M8Pp 9. http://research.stlouisfed.org/publications/review/03/11/pakko.pdf