Files
Abstract
The Economist first launched the concept of the Big Mac Index in 1986 as a guide to whether
currencies were at their correct exchange rate; it is not intended to be a precise predictor of currency
movements around the globe, but simply a way to make exchange-rate theory and discussions
a bit more digestible. First used as a humorous illustration, the term “burgernomics” was
coined and the Big Mac index became an annual occurrence. It is based upon one of the oldest
concepts in international economics – the theory of purchasing-power parity, which argues that
the exchange rate between two currencies should in the long run move towards the rate that
equalizes the prices of identical bundles of traded goods and services in each country. In other
words, a dollar should buy the same amount everywhere.
The reason the Big Mac Index is a better representation of world currencies is because McDonald’s
Big Mac is made and distributed in over 120 countries on six continents. McDonald’s Big
Mac is produced to more or less the same recipe in those countries, so the Big Mac Purchasing
Power Parity (PPP) is an exchange rate that would leave hamburgers costing the same in each
country, including the United States. The index can, however, be distorted by the local input
costs and costs of transportation and distribution.
An undergraduate course, Food and Fiber Marketing, in the Department of Agricultural and Applied
Economics at the University of Georgia is attended by students enrolled in many other disciplines
and colleges than the agricultural economics field. Trying to engage their different learning
styles and experiences to develop interactions between the students and the instructor requires
some imaginative activities. Since they all seem to enjoy eating fast food, even if not a
Big Mac, using the concept of the hamburger as a common currency intrigues them. Comparing
the Big Mac PPP with the actual rates signals if a currency is under- or over-valued, which provides
an application to the exchange rate and trade discussions without worrying about fluctuating
currency/exchange rates. For instance, after its massive currency devaluation a decade ago,
Argentina had the cheapest Big Mac at 78¢, while Switzerland had the most expensive Big Mac
at $3.81, against the average American price of $2.49; the Argentine peso was the most undervalued
currency at the time and the Swiss franc the most overvalued