A survey done by “The Economist” that determines what a country’s exchange rate would have to be for a Big Mac in that country to cost the same as it does in the United States. PPP refers to Purchase Power Parity, which is a theory that currencies adjust according to changes in their purchasing power. With the Big Mac PPP, purchasing power is reflected by the price of a McDonald’s Big Mac in that country. The measure gives an impression of how overvalued or undervalued a currency is.
The calculation of the Big Mac PPP-adjusted exchange rate looks at the price of a Big Mac in a given country and divides it by the price of a U.S. Big Mac. Say we are look at the Big Mac in China. If a Chinese Big Mac is 10.41 Yuan and the U.S. price is $2.90, then according to PPP the exchange rate should be 3.59 Yuan for $1. If the Yuan were trading in the currency market at 8.27 Yuan for $1, the Big Mac PPP indicates that the Yuan is undervalued. Make sense?
*While looking for a picture of a Big Mac... I read that it takes 10 miles of running to burn one! No picture will be provided, I don’t encourage junk food.
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4 comments:
sorry homer..
practice will power
Hehe yeah interesting!
How is Kuwait's price compare to the US? Considering we are pegged to the USD, even if our currency was overvalued there is little that investors/speculators to do to bet against it.
(George Soros "breaking" the bank of england back in the 1990s is a high profile example of currency speculating. He made 1bn, cash, overnight!)
So, did you read this in print or do u subscribe to the Economist?
George Soros when asked what his trade secret was also quoted "I read the economist" hehe. If you want to make macro calls you need to know what is going on and devise some assumptions on where the world is headed. Geopolitical risk is one of the largest and volatile catalysts when making macro trades. Things change so rapidly, just look at Oil volatility when Nigeria and Iran are in the news. Funny stuff. Behavioural finance begins to exam some of these aspects in a greater detail. Fascinating stuff.
Also, in response to al-simpson, I would agree with you there. Demand and supply for a particular item would affect the pricing irrelevant of currency strength. To make it a fair comaprison you would need to use a basket of goods. Then again, different parts of the world have different demand for different consumer goods. Im sure demand for TVs in China (a fast growing emerging market) is alot higher than demand in the UK (a relatively mature market where most households already own one). Surely localised demand/supply will be reflected in the pricing scheme that is applied.
I think this would work better if you could establish whether McDonalds has the same profit margin on their Big Macs everywhere in the world, meaning that cost and price are in proportion to one another. Still though.
Interesting.
Does anyone know what Mc Donalds' margins are?
Did you guys know that the Big Mac is an element of the CPI measure in the US? hehe. I guess you know you're big time when you have a unique product in that index!
Well th
entr: I don't eat big macs so dunno the price.. cant figure out the Big Mac PPP sorry .. and no i am not subscribed to the economist.. i dont like subscribing.. robs me from the experience of going out.. buying my magazine.. buying coffee .. and reading .. the simple things in life
simple is good
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