Monday, January 2, 2012

Big Mac index

Big Mac index-what is the big mac index?

Big Mac index is an informal economic indicators. Big Mac index to measure the exchange rate between two currencies is reasonable in theory. This measurement method assumes that purchasing power parity theory was established. Big Mac Index Index by "The Economist" the editor Pam Woodall (graduated from Manchester University and London School of Economics, majoring in Economics) launched in September 1986. Is the assumption that the world price of McDonald's Big Mac hamburger are the same, and then over the Big Mac price, converted into U.S. dollars through the exchange price, you can compare each country's purchasing power differences.

Big Mac index history:

Big Mac index is from "The Economist" was launched in September 1986, a year after the newspaper published a new index. Big Mac index derived from the English-speaking countries Burgernomics (hamburger economy) is used. In January 2004, "The Economist" The launch of the Tall Latte index (index of coffee in the cup of milk); calculated the same principle, but the Big Mac is replaced by a cup of Starbucks coffee, marking the chain's global expansion. In 1997, the newspaper also published a "Coca-Cola map", with each country's per capita amount of cola drink, more wealth between countries; The figure shows the amount of cola drink more, the more wealthy countries.

"The Economist" Big Mac was chosen because it has the supply in many countries, but also in production around the same specifications, so that the index can be simple and relatively accurate reflection of the actual purchasing power of money around. The latest issue of the "Big Mac Index" released on July 5, 2007, the results show, Big Mac hamburger in China, the lowest price. The index shows that almost all emerging market countries are to some extent the currency is undervalued, overvalued currency is the edge most of the EU countries, such as Iceland, Norway and Switzerland.

"The Economist" and "Hamburger Index" While still a substantial appreciation of the RMB reached conclusion, but they also said, in fact, the index used to compare the same stage of economic development of countries, the more telling. In developed countries like the United States, low-income families may dine at McDonald's several times a week, but in China and some Asian countries, not low-income people may never eat Big Mac.


Big Mac index - the price difference between regions
Big Mac index of the price difference in the bustling streets of Tokyo, Japan "Roppongi," McDonald's sale of the "Big Mac packages," the price is 640 yen. With the adjacent Sea of ​​Japan Tottori McDonald's sold the "Big Mac packages," the price is 560 yen. The same goods in affluent areas of high prices, in the affluent parts of lower-priced "geographic price difference" phenomenon is growing.
McDonald's Japan, this official said, "Even the same commodity, the price will be due to regional differences and different." As prices for income, staff costs, rent and other considerations, the McDonald's price by area is divided into five levels. Therefore, Chiba Prefecture, near Tokyo's "Big Mac package" is 620 yen, Gunma Prefecture is 590 yen, Kyushu's Kumamoto Prefecture is 580 yen. On the other hand, in Tottori, Shimane, Yamagata Prefecture in five places lower prices. We can say that the ingredients in the world price increases in the case, the prices of these areas can be an exception.

In fact, look at the Japanese government released the regional income (2004 base), Tokyo (average 4.56 million yen) ranks first in the country, Tottori Prefecture (237 million yen) in the low 37 bits. In addition, staff costs is also the case, Tokyo's wage costs per hour is 1100 yen, Tottori Prefecture is 700 yen. According to such a situation, if you sell the same goods as the same price, would make low-income areas to higher staff costs, rent and the metropolis's expense. Which will have a "counter-current income" phenomenon. If the 1990s Japan's "price destruction" phenomenon reflected the prevailing economic downturn, it now also reflects the "regional economic differences arising between the regional price difference" of economic theory. "Regional price difference" as the price of the 1990s following the destruction of Japan's new order of prices, the rapid spread.

The premise of purchasing power parity exchange rates for the two currencies will naturally adjust to a level so that a basket of goods in the two currencies for the same price (law of one price). In the Big Mac index, the one "basket" of goods is a fast-food chain McDonald's Big Mac hamburger sold by the store. Select the giant reason is that Big Mac in various countries are available, and it produced around the same specifications, by the local McDonald's distributor responsible for the material bargaining. These factors can make the index more meaningful national currency.

 
Big Mac Index - Example
For example, suppose the price of a Big Mac in the United States is $ 2.50, in the UK priced at £ 2.00; purchasing power parity exchange rate is 2.50 ÷ 2.00 = 1.25. If one U.S. dollar can buy £ 0.55 (or £ 1 = $ 1.82), Big Mac, said the price of the two countries in terms of the pound against the U.S. dollar was overvalued 45.6% ((1.82-1.25) ÷ 1.25 × %).

Big Mac hamburger index measured using purchasing power parity has its limits; for example, local taxes, business competitiveness and hamburgers materials import duties may not represent the country's overall economic situation. In many countries, such as in the international fast food restaurant McDonald's than at a local restaurant of your meal, but the needs of different countries are not the same for the Big Mac. For example, in the United States, low-income families can dine at McDonald's several times a week, but in Malaysia, not low-income people may never eat Big Mac. Nevertheless, the Big Mac index is widely quoted by economists.
 
Big Mac purchasing power parity between the two countries exchange rate calculations, based on a country's Big Mac price in local currency, divided by another country the price of Big Mac in local currency. The quotient is used to compare with the actual exchange rate; if the quotient is lower than the exchange rate, it means the first country's currency is undervalued exchange rate (based on purchasing power parity theory); the contrary, if the quotient is higher than the exchange rate, the first currency exchange rate is overvalued.

Big Mac index, is the assumption that the world price of McDonald's Big Mac hamburger are the same, and then over the Big Mac price, converted into U.S. dollars through the exchange price, you can compare the differences in purchasing power of each country . "The Economist" Big Mac index established for calculating the dollar currency exchange rate is reasonable. Index based on purchasing power parity theory, $ 1 in purchasing power around the world should be the same, if the price of a Big Mac to the lower than in the U.S., it means the currency is undervalued relative to the dollar, on the contrary it is overestimated. The choice of a Big Mac is due in 120 countries and territories are sold, and the production of the same specifications, with a certain reference value.