Big Mac-index

The Big Mac Index is a price index published by The Economist since 1986 as a semi-humorous illustration of purchasing power parity (PPP) between two currencies. The index compares the price of a Big Mac hamburger across different countries, and uses that to infer the relative purchasing power of the currencies in those countries.

To calculate the Big Mac Index, The Economist surveys the price of a Big Mac in McDonald's restaurants in each country. It then uses a PPP conversion factor to compare the prices in different countries. The PPP conversion factor is calculated by comparing the price of a basket of goods and services in different countries.

If the Big Mac is more expensive in one country than in another, then that country's currency is said to be overvalued. If the Big Mac is less expensive in one country than in another, then that country's currency is said to be undervalued.

The Big Mac Index is not a perfect measure of PPP, but it is a simple and widely understood way to compare the purchasing power of different currencies.

Big Mac Index in India in July 2023

According to The Economist's Big Mac Index, the price of a Big Mac in India in July 2023 was INR 219. The price of a Big Mac in the United States in July 2023 was USD 5.58.

To calculate the PPP conversion factor, The Economist uses the following formula:

PPP conversion factor = (price of Big Mac in India) / (price of Big Mac in US)

PPP conversion factor = 219 INR / 5.58 USD

PPP conversion factor = 39.05 INR / USD

This means that the Indian rupee is undervalued by 53.61% against the US dollar.

Limitations of the Big Mac Index

The Big Mac Index has a number of limitations as a measure of PPP:

• It only compares the price of one good, which may not be representative of the overall cost of living in a country.
• The price of a Big Mac can vary significantly within a country, depending on the location and type of restaurant.
• The Big Mac Index does not take into account other factors that can affect purchasing power, such as taxes, transportation costs, and housing costs.

Despite these limitations, the Big Mac Index is a useful tool for understanding the relative purchasing power of different currencies.

Here are some more insights into the Big Mac Index:

• The Big Mac Index is not meant to be a perfect measure of PPP. It is simply a way to get a general sense of how currencies are valued relative to each other.
• The Big Mac Index has been criticized for being too simplistic. It only compares the price of one good, and it does not take into account other factors that can affect purchasing power, such as taxes, transportation costs, and housing costs.
• However, the Big Mac Index has also been praised for its simplicity and its ability to generate public interest in the topic of PPP.

Despite its limitations, the Big Mac Index can be a useful tool for investors and businesses. For example, investors can use the Big Mac Index to identify undervalued currencies, which could be a good investment opportunity. Businesses can use the Big Mac Index to compare their costs of doing business in different countries.

Here are some examples of how the Big Mac Index has been used in recent years:

• In 2015, the Chinese yuan was undervalued by 25% against the US dollar, according to the Big Mac Index. This led some investors to believe that the yuan was a good investment opportunity.
• In 2016, the Brazilian real was undervalued by 40% against the US dollar, according to the Big Mac Index. This led some businesses to consider relocating their operations to Brazil to take advantage of the lower costs.

Overall, the Big Mac Index is a useful tool for understanding the relative purchasing power of different currencies. However, it is important to be aware of its limitations before using it to make investment or business decisions.

Here are some additional things to keep in mind about the Big Mac Index:

• The Big Mac Index is updated quarterly by The Economist.
• The Big Mac Index is not the only measure of PPP. Other measures, such as the Penn World Tables and the World Bank's International Comparison Program, are more comprehensive.
• The Big Mac Index is a popular tool for journalists and economists to discuss the issue of PPP.

I hope this helps!