Consumers who have to buy products every day might have known Big Mac Index. It is a tool for measuring the prices of products to marginalize the variants. According to Burgeronomics theory, the price of the product in the US should be equal to that of the Big Mac basket in the UK.
This is a type of purchasing power parity or PPP formula to help global customers to buy the products at the same prices irrespective of geographic locations. Then it is important for travellers who will pay the same amount to purchase a basket of groceries while staying in a foreign country. It is affordable for an economical person who wants price equalization.
A Brief-up about Big Mac Index
Pam Woodall gave an idea about the Macdonald’s Big Mac Index to adjust the price disparities based on the currency exchange rates. As Macdonald is an international company with numerous stores in most of the countries, exchange rates are fixed on Macdonald’s basket of products using the Big Mac Index formula. It enhances the affordability of purchasing any product without paying extra prices. Customers who live in third-world countries like Somalia have limited financial strength to purchase the same product in Canada. For him, this type of Big Mac Index product purchasing parity must save him a few dollars.
How Does Big Mac Index work?– A Quick Snapshot
The global currency exchange rates and product purchasing prices should not be much different. It will be a burden for consumers to spend a lot of funds to buy the basket of fruits at higher prices when they travel to various countries. The simple calculation is that the product price in one country is divided by the price of the same item in another nation.
The final numerical figure or value is the total sum to compare with the pre-set or current global currency exchange rate. Now, if the calculated sum is higher than the existing/updated exchange rate, the currency of the first country is overrated or overvalued. Same way, the currency of the second country will be undervalued. It happens vice versa as well.
What Is the Advantage of Using PPP or Big Mac Index?
Product manufacturing cost is not the same in all countries. Depending on the availability of labour, geographical location, and the purchasing power of the consumers, the prices are fixed by the government. See, the benchmark of a burger price in America is $5 whereas the same food is available in Poland for $2.5 after currency conversion. So, a Polish customer can buy 2 burgers paying $5. This difference impacts the national and international economy.
As an economist and marketing professional, you will have a preview of the purchasing power capacity of various countries. When you make any budget report or do a price comparison, this Big Mac Index strategy will assist you with perfect calculation.
The consumers who need to go to neighbouring countries should have ideas about the current prices of products sold in the target nations. They will avoid the products which are expensive in other nations. Big Mac index is acceptable to many countries. Every year, the Economist conducts a survey. It deploys representatives to purchase Big Mac baskets across the world.
They eat and evaluate the quality of the burgers. Then they give updated prices of the products after converting the currencies into dollars to check the exact exchange rates. According to the Big Mac index, the less you pay against the dollars, the more of your currency will be undervalued.
Is Big Mac Really Workable?
Renowned economists and statisticians appreciate the effectiveness of the Big Mac Index to wipe out the price gap between the two nations. However, certainly, product shipment cost, climatic condition, inadequate manpower, and limited purchasing power of middle-class people impact the product prices which differ or change at different times. How is Big Mac Index useful to people? Well, it is handy for a researcher or an economist to monitor the financial condition of the people in various nations. Before going to any country, a traveller will have to check Big Mac’s price comparison index to prepare the list to buy the products.
On the other hand, business conglomerates get the superb advantage of applying the Big Mac Index. They can estimate real exchange rates to know about the prices of components used to make the tradable/non-tradable items. It is the graph for them to cross-check the cross-border price dimensions to get accurate real exchange rates. It provides them with new data to study meticulously to have more details about the trend of product purchasing in second and third world countries.
People need to understand the law of Big Mac to get safeguards. Finally, Big Mac Index guides online buyers to have affordable products which are equal in quality but much cost-efficient in other nations like France or China comparing to that in the US. It gives a sample to economists to assess the purchasing behaviour of the consumers who hit the E-commerce sites to purchase products from different countries.