McDonald's Big Mac purchased in Australia

The Big Mac Index is an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. As stated in the Economist, it "seeks to make exchange-rate theory a bit more digestible".^[1] ImageMetadata File history File links Download high resolution version (2048x1536, 637 KB) A Big Mac, purchased in Canberra, Australia, August 2005. ... ImageMetadata File history File links Download high resolution version (2048x1536, 637 KB) A Big Mac, purchased in Canberra, Australia, August 2005. ... McDonalds Corporation (NYSE: MCD) is the worlds largest chain of fast-food restaurants, primarily selling hamburgers, chicken, french fries, milkshakes and soft drinks. ... For other uses, see Big Mac (disambiguation). ... Gross domestic product (by purchasing power parity) in 2006 The purchasing power parity (PPP) theory was developed by Gustav Cassel in 1920. ...

Overview

One suggested method of predicting exchange rate movements is that the rate between two currencies should naturally adjust so that a sample basket of goods and services should cost the same in both currencies. In the Big Mac Index, the "basket" in question is considered to be a single Big Mac sandwich as sold by the McDonald's fast food restaurant chain. The Big Mac was chosen because it is available to a common specification in many countries around the world, with local McDonald's franchisees having significant responsibility for negotiating input prices. For these reasons, the index enables a comparison between many countries' currencies. Some menu items are market specific, which would hinder a comparison, if used. Still other menu items are specially priced, such as the dollar menu in many U.S. restaurants consisting of sandwiches and other items that cost $1. A basket is an economic term for a group of several securities created for the purpose of simultaneous buying or selling. ... For other uses, see Big Mac (disambiguation). ... McDonalds Corporation (NYSE: MCD) is the worlds largest chain of fast-food restaurants, primarily selling hamburgers, chicken, french fries, milkshakes and soft drinks. ... Franchising (from the French for honesty or freedom[1]) is a method of doing business wherein a franchisor licenses trademarks and tried and proven methods of doing business to a franchisee in exchange for a recurring payment, and usually a percentage piece of gross sales or gross profits as well...

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.

For example, suppose the price of a Big Mac is $2.50 in the United States and £2.00 in the United Kingdom; thus, the PPP rate is 2.50/2.00 = 1.25. If, in fact, the US dollar buys £0.50 (or £1 = $2.01), then it is under-valued (1.25 < 2.01) with the respect to the pound by 38% in comparison with the price of the Big Mac in both countries (information as of 2007). The United States dollar is the official currency of the United States. ... “GBP” redirects here. ...

The Economist sometimes produces variants on the theme. For example in January 2004, it showed a Tall Latte index with the Big Mac replaced by a cup of Starbucks coffee. In a similar vein, in 1997, the newspaper drew up a "Coca-Cola map" that showed a strong positive correlation between the amount of Coke consumed per capita in a country and that country's wealth. For other meanings of the name Starbuck, see Starbuck. ... For the several U.S. counties named Coffee, see Coffee County. ... For the band, see 1997 (band). ... The wave shape (known as the dynamic ribbon device) present on all Coca-Cola cans throughout the world derives from the contour of the original Coca-Cola bottles. ...

The burger methodology has limitations in its estimates of the PPP. In many countries, eating at international fast-food chain restaurants such as McDonald's is relatively expensive in comparison to eating at a local restaurant, and the demand for Big Macs is not as large in countries like India as in the United States. Social status of eating at fast food restaurants like McDonald's, local taxes, levels of competition, and import duties on selected items may not be representative of the country's economy as a whole. In addition, there is no theoretical reason why non-tradable goods and services such as property costs should be equal in different countries: this is the theoretical reason for PPPs being different from market exchange rates over time. Nevertheless, the Big Mac Index has become widely cited by economists. McDonalds Corporation (NYSE: MCD) is the worlds largest chain of fast-food restaurants, primarily selling hamburgers, chicken, french fries, milkshakes and soft drinks. ...

See also

• Golden Arches Theory of Conflict Prevention
• List of unusual units of measurement
• List of humorous units of measurement

Countries with McDonalds stores McDonalds is one of the most successful restaurant franchisers in the world, with locations in over 100 countries and territories. ... Unusual units of measurement are sometimes used by scientists, especially physicists and mathematicians, and other technically-minded people such as engineers and programmers, as bits of dry humor combined with putative practical convenience. ... Many comedians and humour writers have made use of, or invented, units of measurement intended primarily for their humour value. ...

References

The Economist is a weekly news and international affairs publication owned by The Economist Newspaper Ltd and edited in London, UK. It has been in continuous publication since September 1843. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 205th day of the year (206th in leap years) in the Gregorian calendar. ...

External links

• The Big Mac Index index page — contains Big Mac Index data dating back to 1997 (Economist.com subscription required for detail)
• The Hamburger Standard - BigMac Index Table
• Big Mac versus iTunes Aplia
• Global Investor Article on Big Mac Index - Discusses origins & significance to international investors - February 9, 2007