DID you know that there is a simple index that can measure a country’s economic level?
Not to be confused with food, the Big Mac Index was spearheaded by The Economist magazine since 1986 to measure the purchasing power (PPP) between two currencies and provide a test of the extent to which market exchange rates result in goods costing the same in different countries.
By using a Big Mac to compare the price of a same product across countries, we can predict a country’s currency value.
This simple comparison of prices does not only compare the price of a Big Mac, but also the purchasing-power parity (PPP).
On the basis of this theory, it can be said that a Big Mac that costs more reflects a higher currency value of that country.
The PPP theory follows the idea that in the long run, exchange rates move towards rates that will match the goods and services of any two countries.
In this case, it is the price of burgers sold in 120 countries.
The founder of the PPP theory then produced what is referred to as Burgernomics, or the economics based on the price of hamburgers in 48 countries.
When a country has lower hamburger prices compared with the price of a hamburger in the country of origin (the United States), then the currency of the country would relatively face a drop in value against the US dollar.
So, which countries have the cheapest and most expensive Big Mac?
On average, the prices differ. In Switzerland, it is sold at US$6.82 (RM28), Norway (US$5.65), Sweden (US$4.79), the US (US$4.97), Russia (US$1.88) and Malaysia (US$2.01).
The Big Mac Index has become a global standard and it is included in a number of economic textbooks, and has at least 20 academic studies revolving the index.
However, the Big Mac Index is applicable only as a guide, as there are other factors that need to be taken into consideration in determining what makes a country’s currency value stronger or weaker when compared with the greenback.
Factors such as high interest rates and stability of a na-
tion contribute to a strong currency.
Though not perfect, the Big Mac Index has been adopted by international financial practitioners to obtain a ballpark or closest figure of the current value of a currency.
DATUK AKHBAR SATAR
Institute of Crime & Criminology, HELP University