Bic Mac Index

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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.

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