The Big Mac Index: A Study of Global Economy and Currency Valuation

This assignment examines the Big Mac Index, a concept developed by The Economist, used to determine currency exchange rates based on the price of a Big Mac burger across different countries. The index is rooted in the Purchasing Power Parity (PPP) theory, which compares the purchasing power of currencies. The analysis reveals how the Big Mac Index identifies overvalued and undervalued currencies. Currencies like the Russian Ruble and South African Rand are often undervalued, while the Swiss Franc and Swedish Krona may be overvalued according to this method. The index's effectiveness is attributed to lower production costs in less developed countries due to cheaper labor. The assignment provides a concise overview of the index's methodology, its application, and the insights it offers into global economic trends and currency valuations.

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Global Economy
13-Jul-19
Student Details

Global Economy
Big Max Index
The Economist had developed the big mac index theory in the year 1986 when the
Macdonald had spread its business over the world (Clements, Lan, & Seah, 2012). They used
this theory to determine the currency exchange rate between the countries. According to this
concept, the exchange rate is decided by the price of a Big Mac Burger in the required
countries. This concept is developed on the basis of Purchase Power Parity theory (PPP
theory) where the purchasing power of currencies is put against one another to figure out the
exchange rates. While following big max index theory the prices of some currencies are
overvalued and undervalued. Currencies such as Russian Ruble, South Africa Rand are
undervalued in this theory whereas Swiss Franc, Swedish Krona currencies are overvalued
according to this valuation method (The big mac index, 2018). This concept is accepted to be
working because of the cost of producing the product is expected to be comparatively lower
in the less developed countries due to the cheap availability of labor.
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Global Economy
References
The big mac index. (2018, 1 17). Retrieved 7 10, 2019, from The economist:
https://www.economist.com/comment/2186355
Clements, K. W., Lan, Y., & Seah, S. P. (2012). The Big Mac Index two decades on: an
evaluation of burgernomics. International Journal of Finance & Economics, 17(1),
31-60.
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