Big Mac Essay

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Big Mac, which is provided by McDonald Restaurant, is the most famous burger in the world. There are about 550 million big macs sold every Year in United States (Alfano, 2007). It is amazing that no matter where or when you buy a Big Mac in McDonald restaurant all over the world, you will get the same thing. The taste, the ingredients are all the same. As the result, you suppose pay the same amount of money if exchange to U.S. dollars. However, the fact is not. Based on the data published by The Economist, The average price in American and China in 2015 was $4.79 and $2.74 on market exchange rate (L.D., July 16th 2015). Why people pay different price for the same food in different countries? To explain this phenomenon, Big Mac Index …show more content…

Purchasing Power Parity is a theory that assume in long-run it would cost the same to buy a market basket of goods between two currencies by using dollars on market exchange rate (Antweiler, 2011). Purchasing Power Parity reflect the reality purchasing power for one currency and help to minimize errors of GDP. For example, based on the data from World Bank Group, the Gross Domestic Product in China was worth 10360.10 billion US dollars in 2014 (Bank, 2015). This amount of GDP might be inferred to have higher real GDP if market exchange rates not reflect the real exchange rate. In other word, the amount of Yuan exchange to US dollars actually could buy more basket of goods than it is right now. Which means Yuan was undervalued. Big Mac Index used price of Big Mac in United States and China to compare the purchasing power and got the same …show more content…

It is a good that decrease in demand when consumer income increase (A. O'Sullivan, 2014). People who has higher income will less likely to eat Big Mac. However in China, as one of the international fast-food, Big Mac is a normal good. People has lower income will not afford eating Big Mac daily. As a result, demand of Big Mac relatively lower than United States. Additionally, American food is less popular in China than local food because of diet habits. That leads the demand lower as well. According to Demand and Supply curve, the lower demand draws down the price of Big Mac (A. O'Sullivan, 2014). Thus that the price of Big Mac should be lower in China than United States. Since Big Mac index fail to consider the influence of demand to price in different counties, the index is not

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