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Thread: Big Mac Price Index $ value

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    Default Big Mac Price Index $ value

    I was reading at college today the Big Mac Currency price index, it was intresting how old Mcd's cost so much in different countries, like in China a Big Mac cost equiv to US$2.57, here in Aussie it's like $5.00US for a Big Mac, which makes me believe we are getting ripped.. I know mcd's is bad for you but sometime's its just convenience ad really is not that bad if you hold the fries and coke, how much is a Quarter Pounder in US$.. or a Big Mac.. do you guys get McChicken's over there.. there only good if u ask for cheese here

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    Default Re: Big Mac Price Index $ value

    Actually the Big Mac Index is a recurring topic of discussion in the Dollar Den. In reality, it has very little to do with hamburgers. It arguably has a whole lot to do with the 'purchasing power' of the world's different currencies, and quite a bit to do with the labor costs / tax rates / regulatory compliance costs for businesses operating in different countries.

    From

    (snip)"THE Big Mac index was invented by The Economist in 1986 as a lighthearted 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 at the start of 2013 was $4.37; in China it was only $2.57 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 41% at that time.

    Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies."(snip) This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today's equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation."(snip)




    In terms of Australia, the undervalued Aussie Dollar that makes a Big Mac more expensive to buy in Australia also makes exports of everything from beef to coal to other countries more profitable for Australian companies thus creating / sustaining more Australian jobs.


    However, to gain a different perspective, just because Big Mac is priced far lower ( in converted local currency terms ) in China does NOT mean that the Big Mac is more 'affordable' for Chinese customers. To gage comparative standard of living in different countries, you have to view cost of the Big Mac in terms of the average worker earnings level in that country ...




    Also, the Big Mac Index can be used as a comparative measure of 'real world' price inflation by comparing yearly index values for the same country ... as shown by the American Big Mac Index year over year comparison chart below. Contrary to gov't statistics, it shows that the 'real world' price inflation based on a US BigMac has increased by 21% over the past four years.

    Last edited by Melonie; 04-20-2013 at 08:36 AM.

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