Burgernomics

U.S. dollar/Mexican peso exchange rate is 1/15 pesos.

Big Mac in the U.S. is $3, the price of a Big Mac in Mexico
would be 45 pesos assuming the countries have
purchasing power parity.
If, however, the price of a Big Mac in Mexico is 60 pesos,
Mexican fast-food shop owners could buy Big Macs in the
U.S. for $3, at a cost of 45 pesos, and sell each in Mexico
for 60 pesos, making a 15-peso risk-free gain.
To exploit this arbitrage, the demand for U.S. Big Macs
would drive the U.S. Big Mac price up to $4, at which point
the Mexican fast-food shop owners would have no risk-free
gain. This is because it would cost them 60 pesos to buy
U.S. Big Macs, which is the same price as in Mexico thus
restoring PPP.

Burgernomics
In the example above, where the Big Mac is
at a price of $3 and 60 pesos, a PPP
exchange rate of US$1 to 20 pesos is
implied.
The peso is overvalued against the U.S.
dollar by 33% (as per the calculation: (2015)/15)
The dollar is undervalued against the peso
by 25% (as per the calculation: (0.050.067)/0.067).

The Big Mac Index or

Burgernomics
Created by The Economist in 1986
Tracks 20 years of data
Published Quarterly!

The Big Mac Index or

Burgernomics
Big Mac has same recipe (ingredients) in
120 countries.
So, Big Mac SHOULD cost same in each
country, but it Doesnt!!

The Big Mac Index or

Burgernomics
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.

The Big Mac Index or

Burgernomics
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

The Big Mac Index or

Burgernomics
Comparing a currencys actual exchange rate
with its PPP is one test of whether the currency
is undervalued or overvalued.
Is other nations currency:
* OVERVALUED?
Costs MORE to buy Big Mac than in USA
or
* UNDERVALUED?
Costs LESS to buy Big Mac than in USA

The Big Mac Index or

Burgernomics
Making Your OWN Big Mac Index

The Big Mac Index or

Burgernomics

Making Your OWN Big Mac Index

The Big Mac Index or

Burgernomics
May be hard to digest local prices distorted by taxes (VAT, tariff)
Transport Costs
barriers on meat
sales taxes or difference in property rents!
Competiton (or lack of it)

The Big Mac Index or

Burgernomics

The Big Mac Index or

Burgernomics