Evaluating The Big Mac Index Essay

696 words - 3 pages

Analyzing the Big Mac IndexThe purpose of this paper is to analyze and discuss the Big Mac index. An analysis will be made on how the index is used in global financing operations. Furthermore an evaluation will be made of the Big Mac index and its importance in managing risks.In September 1986, the Economist introduced the Big Mac index to the world as a way to examine the purchasing power parity (PPP) in a humorous way between two countries. The PPP is defined as "the theory that, in the long run, identical products and services in different countries should cost the same in different countries" (investorwords.com, 2006, 1). The belief in the PPP is that eventually exchange rates between countries' will even out to avoid someone buying something cheaper in one country and selling it for a profit in another. Another way to look at the PPP and the Big Mac index is "Burgernomics", which goes by the notion that "a dollar should buy the same amount in all countries" (Economist, n.d., 1).The Economist chose to show what it costs to buy the Big Mac in other countries is in comparison to the dollar. The purpose of the Big Mac index is to show the value of foreign currency and to give an indication whether it is over or under valued. The Big Mac was used because in 1986, McDonald's was one of the few companies that had spread globally and it was a common term in many languages. In 2004 the economist created a similar tool like the Big Mac index when it created the Tall Latte index. The purpose of the Tall Latte index is similar and just updates to show a different product given the growth of Starbucks across the globe.The Big Mac PPP index between two countries is derived by dividing the cost of the Big Mac in one currency by the cost in another currency. An example is shown below.U.S. Cost of Big Mac = $2.80British Cost of Big Mac = $2.25The result of this example gives you a PPP rate of 1.24. If...

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