The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.
Here is something that I put together using the the Big Mac index from The Economist website. Students have to complete the table below and answer the questions that follow. It makes for a good discussion of PPP amongst countries
The Big Mac Index – January 2018
* Estimated figures
1. Complete the table above. In which country was their actual exchange rate on January 2018 closest to their Big Mac exchange rate?
2. Which country’s currency is suggested by your calculations above as being
a) the most undervalued against the dollar, and
b) the most overvalued against the dollar?
3. What factors could have an influence on exchange rate values on a given date as shown in the table above?
4. Differences in the prices of hamburgers could exist in the real world for a number of reasons. Suggest one reason relating to a) supply and b) demand which could lead to apparent deviations from equilibrium exchange rate values.