Question

Look up where the Big Mac index stands today. Where is the United States relative to other countries? Which are the most expensive and which are the cheapest countries? How would this index suggest that the U.S. dollar should move relative to these currencies in the future if you believed in long-run PPP?

Answer 1

The Big Mac Index functions as a proxy for purchasing power parity of different currencies across diverse countries. It is expressed in US $ and is the price of a standard (in terms of size, quality, composition, and ingredients) McDonalds Big MacBurger. The Big Mac Index was developed by the Economist Magazine in 1986 as a semi-humorous and easy to understand method to explain the concept of purchasing power parity.

The Big Mac Index for the United States is 5.3 which implies that a standard Big Mac burger will cost $ 5.3 in the US at present. (Source of date "statista.com)

The most expensive countries in the Big Mac Index are Switzerland, Norway, and Sweden with Big Mac Ratings of 6.8, 6.3 and 6.1 respectively. The three cheapest countries are Ukraine Egypt and Malaysia with Big Mac Index Values of 1.6, 1.9 and 2.3 respectively.

The higher value of Big Mac Index in the three most expensive nations imply that the same good (the Big Mac Burger) requires greater dollar value to purchase in these countries(as compared to the US). This, in turn, should imply that the currencies of these countries are overvalued with respect to the dollar and hence should depreciate relative to it. In other words, the $ should appreciate relative to the currencies of Switzerland, Norway, and Sweden. The opposite is true about Malaysia, Egypt, and Ukraine, where the same good (the Big Mac Burger) is cheaper (as compared to the US). This would imply that their currencies are undervalued relative to the $ and should appreciate against it. In other words, it would imply a $ depreciation with respect to the currencies of Egypt, Malaysia, and Ukraine.