Big Mac Index – with a pinch of salt?

Here is a useful video clip on the Big Mac index – also referred to as Burgernomics. Developed by “The Economist” magazine it is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad – the video explains PPP and shows how undervalued / overvalued an exchange rate is relative to a Big Mac exchange rate.

For example, the average price of a Big Mac in America in January 2015 was $4.79; in China it was only $2.77 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 42% at that time. However, the index does not consider the different levels of income, as most of the burger’s cost depends on local inputs which vary considerably between countries. See the clip below

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