Big Mac - Right Out Of The Box

Big Mac – Right Out Of The Box

The Big Mac Index is a useful tool in comparing the relative values of the currencies of different countries.

Last Week, In Switzerland, a Big Mac Cost $7.54.  The Economist invented the Big Mac Index in 1986 as an entertaining way to assess whether currencies were at the “correct” levels. The index uses purchasing power parity (PPP) to measure one currency against another. PPP is the idea that exchange rates should adjust so the same product (in this case, a hamburger) has the same price in two different countries when the price is denominated in the same currency. After updating the Index on January 22, 2015, The Economist reported:

“Two trends have dominated the world of burgernomics over the past six months: currency markets have bubbled like potatoes in a fryer as the oil price has fallen to finger-licking lows and central banks have cooked up new monetary stances. The currencies of commodity exporters have been burnt while those of big importers have sizzled. Meanwhile, the end of quantitative easing in America has supersized the dollar, whereas the mere prospect of it in Europe has made a happy meal of the euro.”

Since a Big Mac in the United States cost about $4.79 last week, the Swiss franc was quite overvalued. That’s not the case with currencies elsewhere, though. Here are the prices of a Big Mac in a few key locales:

Norway           $6.30

Denmark         $5.38

Brazil              $5.21

Australia         $4.32

Euro area         $4.26

Mexico            $3.35

China               $2.77

India                $1.89

Russia             $1.36

It should be noted the Big Mac Index is not a perfect measurement tool. The price of a burger should be less in countries with lower labor costs and more in countries with higher labor costs. When prices are adjusted for labor, the Swiss franc is not the most overvalued currency in the world, the Brazilian real is.

Weekly Focus – Think About It

“The hardest skill to acquire in this sport is the one where you compete all out, give it all you have, and you are still getting beat no matter what you do. When you have the killer instinct to fight through that, it is very special.”

–Eddie Reese, USA Olympic Swim Team Head Coach, 2004 and 2008

Sources:

http://www.economist.com/content/big-mac-index (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/01-26-15_TheEconomist-The_Big_Mac_Index-Footnote_5.pdf)

http://www.investopedia.com/terms/p/ppp.asp

http://www.economist.com/news/finance-and-economics/21640370-some-currencies-lose-weight-diet-qe-and-cheap-oil-others-bulk-up-oily-and?fsrc=nlw%7Chig%7C22-01-2015%7CNA (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/01-26-15_TheEconomist-Oily_and_Easy-Footnote_7.pdf)

http://www.rd.com/slideshows/13-motivational-sports-quotes-from-olympic-coaches/#ixzz3PazUV93P=&slideshow=slide10

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