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Busi604 - Big Mac Index

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BUSI604: Forum 2 – Big Mac Index

Eddie Kautzky

Liberty University

Dr. John Karaffa

April 6th, 2019


Forum 2

Key Term and Why You Are Interested in It

The key term that I chose for this week’s forum is the Big Mac Index.  The reasoning behind my interest in this term is both of an academic and personal nature.  I was first introduced to this key term a few years back while I was taking my first global business class through Liberty University.  I found it very interesting then and still do today that a fast food menu item was chosen as the basis for an economic index used globally to demonstrate Purchasing Power Parity (PPP).   From the personal aspect, I enjoy traveling and have had the opportunity to travel to several foreign countries and look forward to visiting several more in the next few years with my family.  I believe that the research I will be conducting on the Big Mac Index will further my overall knowledge of exchange rates, which to an international traveler can prove to be very beneficial.  

        

Explanation of the Key Term

The Big Mac Index was originally introduced by The Economist magazine back in 1986 as a means in which to simplistically demonstrate the relative valuation of currencies (Bates, 2013).  The basic concept behind the Big Mac Index is that wherever you go in the world a Big Mac, from McDonalds, is going to basically be the same thing.  Since the inputs related to the production and sale of the Big Mac involve several different commodities such as agriculture, labor, advertising, real estate cost and transportation it can be used as a tool to measure exchange rate Purchasing Power Parity between countries (Satterlee, 2018).   For example, based on this concept if you were to purchase a Big Mac in the US for $5.00 and one in Mexico for 95 Mexican pesos it is safe to assume that the currency exchange rate would be approximately 19 pesos to one US dollar.  If the exchange rate varied to greatly from the 19 pesos to one US dollar then one of the two currencies would have to be considered as either undervalued or overvalued.

Major Article Summary

The article I chose to summarize was the article titled The Big Mac Index and Real Income Disparity by Vidya Atal.  In the article Atal takes the basic premise of the Big Mac Index (BMI) one step further by also incorporating the Gross Domestic Product (GDP) per capita for the countries studied.  Atal’s study used 2012 financial information for 54 countries to measure their affordability index.  The affordability index is described by Atal (2014) as the number of Big Mac burgers an average person could afford per day based on individual inputs for their respective countries.  To attain this calculation Atal took the 2012 GDP, in US dollars, divided by the countries’ respective Big Mac prices in July of 2012.  She then took that number divided by 365 to get the daily affordability of the Big Mac.  The results of her study showed “a huge real-income disparity across countries” (Atal, 2012, p. 8) as even though Big Mac burgers were very cheap in some countries, the locals could barely afford to purchase them.  

In the next portion of her study, Atal then took the same formula of dividing the GDP per capita by the mid-year Big Mac price for the corresponding country and then divided it by 365 for the years of 2000-2012 for the countries of Brazil, China, Russia and the US.  When comparing the countries Big Mac affordability indexes side by side it, was observed that over the 13 years the Big Mac affordability indexes in China and Russia showed a steady increase while the US steadily declined in the same period.  The US results showed that in 2003 the average American could purchase 42 burgers then just 9 years later that purchasing power declined by nearly 10 burgers down to only 32.7 by 2012.  Atal (2014) is blaming the recession of this period as triggering the decline as even though the inflation rate was insignificant the nominal wages did not keep up.  Thus, average Americans experienced a loss of income in real teams during this time.  

Through this study Atal found that across the countries studied India had the cheapest price per burger, but were only able to afford 3 burgers per day.  Which squashed the layperson’s view that countries having cheaper burgers should corelate into having a higher Big Mac affordability.  It was also found that the countries of Pakistan, India and the Philippines had the lowest Big Mac affordability coming in at less than 3 burgers a day, while Hong Kong, Singapore and Australia had the highest affordability ranging from 40-47 burgers a day.   Atal concluded that lower cost Big Macs does not necessarily correlate into having a stronger economy or increased purchasing power and that other factors have to be considered.

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