Big Mac burgers of McDonald’s, one of our favorite go-to places is in the eyes of economists. But why?
Economists use the price of Big Mac to check purchasing power parity (PPP). In simple terms to find out whether the domestic currency is over-valued or under-valued in the comparison of foreign currencies.
Umm confusing, right? Okay, let me give you an example, why we prefer to buy an iPhone from the US over India? Because we get it in less amount of money. Ideally, the price of the iPhone should be the same in both countries after adjusting exchange rates. This conveys, if the price of the iPhone is 1 kidney, I mean ₹ 1 lac in India, then it should cost $ 1,333 in the USA (assuming $1 = ₹75). But usually, it costs less than $ 1,333 in the US. This imbalance between the price is known as purchasing power parity.
To compare different currencies, we make a basket of goods (select some goods), compare their prices in those countries, and calculate that whether one country’s currency is undervalued or overvalued compared to other countries.
Taking the same example of the iPhone, it’s easy to state that we can buy more units of iPhone in the US than in India with the same amount of money. Which shows us that Indian rupee is undervalued compared to the US dollar.
Oh, you are wondering about Big Mac, no no that wasn’t click-bait. Economists had introduced an index known as Big Mac Index, under that, they check the price of Mac burger across various countries and compare it with their current exchange rates, which gives them a rough idea of PPP between those countries.
But why Big Mac? Was the economist who had developed this index was a foodie? Well, the price of a burger from McDonald’s gives us an idea of the country’s production, agriculture, real estate as well as development as a whole.
Here is the chart of 2020’s Big Mac index:
Credit: fxssi.com
Let’s analyze the data a bit:
The Indian rupee (13th from the top in table) is 53.22% undervalued compared to the US dollar. Which interprets that, we pay almost 1.5 times more for a Big Mac w.r.t the US. (unfair, no?)
Only two countries’ currencies are overvalued than the US from the chart.
South African currency is the world's most undervalued currency.
The Indian rupee is even undervalued compared to the currencies of nations like Pakistan and Sri Lanka.
Hey, now next time, when you go to McD and order your burger, remember that that combination of bun, sauce, and veggies has some bigger purpose than just filling your stomach.
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