Is the Big Mac Index a Good Measure of Purchasing Power Parity?

697 Words3 Pages
“Is the Big Mac index a good measure of Purchasing Power Parity?” Purchasing Power Parity is a concept that states that the exchange rates of different countries are in equilibrium when the purchasing power is the same in all the countries. A basket of goods is taken into the picture which is available for sale in those countries.Thus according to the theory of Purchasing Power Parity, the exchange rates are in equilibrium, when the above mentioned ‘basket of goods’ cost the same in all the countries. If a country’s domestic price level increases, that is, if the country is facing inflation, that country’s exchange rate must be depreciated in order to return to PPP. The PPP is used worldwide to compare the different price levels in different countries. The calculation of PPP is a tough one as its difficult to find a comparable basket of goods for different countries. People of different countries consume different baskets of goods. However, there are ways of measuring the PPP. There are different ways of measuring PPP. Some of the measures are Law of one price, the big mac index and ipad index. The simplest way of calculating PPP is choosing a standard good which is commonly used in almost all countries. The Big Mac Index is a survey invented by THE ECONOMIST in 1986.It is invented to check whether currencies of different countries are at their correct price levels. This method takes into consideration the average price of the Big Mac Burger, sold in McDonalds in different countries. It takes the average price of the Big Mac burger of McDonalds across different countries to measure the change in prices every year, i.e the inflation in that particular country. According to this method,the price of the Mac burger in US is taken as the base .The Big Mac PPP calculation takes the price of a Big Mac Burger in one country(in its currency) and divides it by the price of

More about Is the Big Mac Index a Good Measure of Purchasing Power Parity?

Open Document