Big mac index us price history how to#

Nevertheless, it can still serve as a kind of indicator. The purpose of its creation was to simplify the understanding of a rather complex phenomenon, as well as to create the most visual indicator of what is happening in the world economy. In fact, this indicator has nothing to do with forecasting exchange rates.

Big mac index us price history how to#

What does the Big Mac index affect and how to use it in trading on the stock exchange If we are guided by the fact that the same burgers should have an equivalent price in different countries, we can determine how much, according to the theory of purchasing power parity, one or another currency is undervalued or overvalued in relation to another. When calculating, there is an assumption that any of the ingredients can be delivered to another country for free, which means their cost should be equivalent. In fact, the exchange rate of the US currency today exceeds 1.2, which suggests that Euro is seriously overvalued, judging by its purchasing power. Then the fair ratio of the exchange rates of these currencies should be 2 to 4 or 50 cents per dollar. Let's assume that in Germany Big Mac costs 2 Euros at the official exchange rate, and in the USA it costs $4. The calculation of this indicator is extremely simple. Read more: What is the Consumer Confidence Index (CCI) How the Big Mac index is calculated and how it works Thus, this index is a kind of simplified formula for calculating the ratio of the purchasing power of currencies of different countries based on one product. Secondly, the Big Mac contains a sufficient amount of food components (bread, meat, cheese and vegetables), which allows, with some assumptions, to accept it as an analogue of the food basket consumed by the population.Firstly, it is sold by McDonald's in most countries of the world and has the same size and recipe everywhere, which is why it can be taken as a constant.The Big Mac was chosen as an indicator for several reasons: Usually, the US dollar is used as the basis. Based on his testimony, it is possible to determine how undervalued one currency is in relation to another. The Big Mac index in simple words is the ratio of exchange rates expressed in terms of the cost of the burgers of the same name. Because (according to this theory, and not in reality) apples have the same value both in Germany and in the USA. Therefore, the exchange rate is 0.5 dollars per Euro. For example, if an apple costs 2 Euros in Germany, and 1 dollar in the USA, then 2 Euros are worth 1 dollar. Purchasing power parity is a theory according to which currencies of different countries need to be compared by how much money is required to pay for the same product in different countries.

This helps to determine a 'fair' exchange rate based on purchasing power. This indicator shows how many world-famous burgers can be bought for the same price in different countries. In other words, it shows the ratio of exchange rates of different countries in terms of Big Macs. The Big Mac Index is a variant of determining purchasing power parity (PPP) expressed in terms of the price of a burger. This indicator is not among the official ones, but it is known almost all over the world.

Below you will find out what this indicator is, on the basis of which it is calculated and what practical significance it has, as well as see examples of similar indices. For more than 30 years, The Economist magazine has been calculating the Big Mac Index.