In September of 1986, the Economist launched an index of the of Big Mac prices throughout the world. Initially the idea was somewhat of a joke by poking fun of Index publications. The joke turned serious and as a result Big Mac Index is still going strong to this day. The index as it turns out, is a great tool to measure Purchasing Power Parity, otherwise known as PPP.
What can the Big Mac index do for you? The Index is used as a method of predicting exchange rate movements. Why? Because the rate between two currencies should naturally adjust so that the Big Mac cost the same in both the US Dollar and whatever currency we are comparing it to. The Big Mac was chosen because the Burger is basically the same wherever you go and more importantly, you can buy the same tasty Big Mac almost anywhere in the world. It is also a lot easier to compare a Big Mac then a Quarter Pounder with cheese for example, because according to Pulp Fiction we would have to change the name to “Royal with Cheese” if we were in France. So Basically the Big Mac is the same burger, same name and many locations throughout the world.
For our paper, we obtained the Big Mac PPP exchange rate between the US Dollar and the Canadian Dollar, Japanese Yen, Pound Sterling and the Singapore Dollar. We first wanted to know what the exchange rate should be by taking the (current Exchange Rate)*(US Dollars per Burger / Local Currency per Burger). We then wanted to find out if the currency is over or under-valued according to our figures. We obtained this information by (Exchange Rate minus should be rate)/ (Should Be value from previous equation). If this percentage is positive then we believe the currency is over-valued. If this currency is negative then we believe the currency to be under-valued.
We expect to see currencies that we believe are under valued according to the Big Mac Index to appreciate against the dollar in the next few years. If the currency is overvalued, according the Big Mac Index, we would expect to see the currency depreciate over the next few years.
We did see through our data that the Canadian Dollar did rebound against the US dollar after its low value in 2002. On the surface the Big Mac Index held up almost perfect for explaining the surge in Canadian Dollar value versus the US Dollar.
For example, on March 30, 2015 the exchange rate between the Canadian and US dollar was $1.2690/US$, and on March 31, 2015 the exchange rate was $1.2677/US$. Due to the fact the US dollar appreciated against the Canadian dollar, the revenue recorded on the consolidated statements of earning would be at a higher value on March 31st than it would have been on March
The rate of a Big Mac compare at a local McDonald’s is that the Big Mac index was created by The Economist in 2009 as a light-hearted direct to whether money are at their “accurate” level. It is related on the hypothesis of “purchasing-power parity”, the idea that in the long run swaps rates must move in the way of the speed that would match the prices of an equal basket of commodities and services in any two countries. The average rate of a Big Mac in united state in July 2009 was 4.79 dollar.
The real exchange rate tells us the rate at which we can trade the goods of one country for goods from other countries. The real exchange rate some- times referred to as the terms of trade. To view the exchange rate relationship in real terms using the nominal exchange rate, can be taken samples h a goods produced in some countries, such as cars. Suppose the price of the car with 25,000 dollars, while the price of Japanese cars is 4,000,000 yen . To compare the prices of both cars , we have to transform them into a common currency. If one dollar worth of 80 yen , the price of cars Americans to 80 x 25,000, or 2,000,000 yen. By comparing the price of an American car (2,000,000 yen) and the price of Japanese cars (4,000,000 yen), it can be concluded that the price of the American car is half the price of Japanese cars . In other words, pad a price effect we can swap two American cars to get a Japanese car . Peng count can be written as
In a healthy economy, the increase in inflation probably points to higher interest rates, this will favor the currency under discussion, in this case, the dollar. However, many factors determine exchange rates, and all are related to the commercial relationship between countries.
Strong is good. Weak is bad. These generalizations sound simple enough, but they can be very confusing when come to money. Is a "strong" U.S. dollar always good? Is a "weak" dollar always bad? Understanding of it is a necessary in marketplace. The term such as “Strong” and “weak” dollar is a “hot topic” which always bandied about by economist on a daily basis and also public. This issue is so important to almost every one. It seems like part and parcel of people who very concern about currency likes investors, economist, foreigners who study or working in the United State and so on.
believe that the USD will depreciate against EUR and think that it can bear the risk of appreciation
External purchasing power of a currency reflects the value of how much a consumer can buy with a particular amount of home currency in a different country. In order to determine the external purchasing power of a pound in the USA, as per our example, we would need to convert the pounds into dollars and then calculate how many consumption bundles we would be ...
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
Although the Japanese central bank performs an unpleasant float regime, the yen certainly strengthens its value when there are serious financial events that could endanger the financial world. Likewise, the Japanese government applies several questionable rulings that tends to be damper to foreign investors particular for Cola-Cola?s business and its long term investment in this region.
In addition, the future exchange rate can lead to decrease Tiffany 's profits because the yen is thought to be overvalued in comparison to the dollar. These risks are fairly serious because the extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be.
...nsive to produce products in Canada (Dobson). This has direct impact on Ontario businesses, in particular importers and exporters. The higher the dollar the less foreign businesses would buy from Canadians.
Kuntara Pukthuanthong and Richard Roll (2011) studied the relationship between gold and USD/Yen, US/Euro, and US/Pound exchange rates and found hat gold returns in a currency are related with currency depreciation most of the time for the countries including US, Japan, Euro zone area and Britain. This study also found that Gold prices expressed in different currencies are highly correlated, around 0.9 using daily gold returns in the four major currencies studied. Gold prices at level are moderately correlated with the price of foreign currency. In most periods, gold is associated with weakness in a currency.
Their ease of conducting business and trading across borders ranks favorably for American consider expanding in Canada (Cubbage et al., 2010). The U.S. dollar because of its strength and purchasing power is attractive to many other countries including Canada. Imports and exports play a vital role in the attractiveness of the dollar. If a wood produced in Canada is less expensive than wood produced in the U.S. imports will escalate, and exports will plummet. These factors result in the U.S. dollar being more or less enticing to consumer and investors at various intervals. Robson & Laidler (2002) explored the possibility of Canada adopting the U.S. dollar as their official currency. They argued it reduces the cost of transactions and improves decision-making in Canada. Each government can print money based on a need to combat events such as inflation and deflation and, in turn, affect the exchange
The economy in the United States was recently experiencing what is now called the Great Recession which occurred from December of 2007 to June of 2009. During this recession we experienced a decrease in our gross domestic product and experienced an increase to our unemployment. Since 2003 the American economy has been seen inflation rates as low as .1% in 2008 and as high as 4.1% in 2007. Rates such as these detail the increase and decrease in prices of products throughout the economy and has a considerable influence on the supply and demand of goods from cars to bread. In the past ten years inflation rates have continually seen positive values w...