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| Name | The Big Mac Index : Measurement Of Purchasing Power Parity |
| Video Uploader | Video From 3-Minute Explanation |
| Upload Date | This Video Uploaded At 26-03-2022 10:32:45 |
| Video Discription | What is The Big Mac Index? The Big Mac Index is an economic indicator to measure the difference in consumer purchasing power between different countries. Put simply, it means how much a consumer will spend to buy a Big Mac burger in their countries. This index was first created in The Economist magazine in 1986 as a measurement of purchasing power parity (PPP) between nations, and then this term is widely spread around the world. The reason to use the price of a McDonald's Big Mac as the benchmark for comparison is that different countries may have different types of groceries in consumers' brackets. The item which will be used as the benchmark must be from a global company which has business in most of the countries, and the item itself must also be well known by most of the people around the world. The Big Mac burger is a good candidate which satisfies all those conditions. How to calculate Big Max Index? Although the Big Mac Index is never considered as a precise economic indicator to measure the exchange rate, it quickly becomes a global standard for price comparison due to its simplicity. For example, as mentioned by the Economist magazine, in 2019, people will pay $5.58 to buy a Big Mac in the U.S. and 3.19 pounds for the same burger in the U.K. The ratio between those prices is 3.19/5.58 = 0.57. At the same time, the exchange rate of two currencies is 0.78, which means the British pound was undervalued by 27% against the U.S. dollar. There is no complex mathematical calculation, but everyone can roughly see which currencies are currently undervalued or overvalued instantly. Determining Factors Of Big Mac Index Ideally, the difference of Big Mac burger price should be related with the exchange rate. However, in reality, the final price will be determined by a lot of factors. The first one is the tax or tariff which will be issued by the governments. Different countries will have different sales tax rates, such as GST or VAT. In countries with high sales tax rates, all goods, including the Big Mac Burger, will sell at a relatively higher price than other countries. The cost of transportation and labor is another factor for the final price of the burger. Different countries will have different labor costs. Also, the cost of fuel is also different country by country. For example, for those oil-producing countries, the petrol price will be much cheaper than other countries. Another important factor for the market price is the level of competition. Let's take Mcdonald's as an example, if there are lots of fast-food restaurants around, the price of its burger might be low. Last but not least, the expected inflation of a nation's currency is also an important factor for the item price. It represents the rate at which the price of goods is changing in this country. Usage In Macroeconomics The Big Mac index is a specific example of Purchasing Power Parity, which is used by macroeconomic analysis to compare the exchange rate of different countries' currencies through a "basket of goods" approach. When we compare the economy of two countries, the normal way we will use is the nominal Gross Domestic Product represented by US dollars. Due to the fact that currencies may be manipulated. GDP by PPP, which is based on a basket of goods in different countries, can be a fairer comparison than the nominal GDP. |
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