Question

Assume you are attending a meeting on the subject of exchange rates, specifically on the topic of the Economist's Big Mac Index and what this means for your firm's business in some countries. Assume that your firm has a subsidiary in Switzerland which functions as a shell corporation and operating subsidiaries in China, Brazil, and Malaysia. What does the Big Mac Index suggest in terms of risk to the firm and what can be done about it? (NOTE: make sure you refer to the most recent Big Mac Index.)

Answer 1

The Big Mc Index is an index created on the basis of purchasing power parity theory. The Big Mac index states that the currency exchange rates must be equal to the price of the basket of goods & services in various countries. hence the price of Big Mc reflects a number of economic factors like cost of ingredients, cost of local production & cost of advertising etc. hence this is a reasonable metric for measuring the purchasing power.

anyone can make use of the big mach index by dividing the price of big mac in one country by price of big mac in aother country in order to arrive at the exchange rate. this is then compared with the official exchange rate in order to find if a currency has been under or over valued.

investors can also used the big mac index to measure the change in values over time in order to know the rates of inflation.

To conclude, investors can use the big mac index as one of the tools in analyzing the international markets.