What McDonald's Can Tell Us About Global Currencies

The flagship McDonald's Corp MCD burger can be used for more than a consistent lunch on the go. It can also be used to measure currency values and give insight to whether one currency is “overvalued” or “undervalued” to another currency.

What's The Big Mac Index? The index is a non-official way developed by The Economist in 1986 as a way to compare currency values.

Although it's a witty way to compare currencies, many economic textbooks and academic papers have used this index. The Economist even updates the values monthly and tracks data on over 15 different currencies.

The index centers around an idea economists refer to as price purchasing parity.

What's Price Purchasing Parity? It's used to compare prices that differ between different countries for the same good. Economists often use the example of looking at what a basket of goods costs in another country.

Economic factors such as inflation and exchange rates that differ from country to country change the cost of items that are alike.

The Big Mac Index is used in place of this “basket” of goods because the Big Mac can be found almost anywhere in the world and most people know what it is. Price purchasing parity is often used when comparing GDP among countries.

A Bite At An Example: A Big Mac costs $5.71 stateside, per The Economist data as of July 23. This same burger costs 390 yen in Japan.

Therefore, the implied exchange rate is 68.30, or 390 divided by 5.71. Yet the difference between the implied exchange rate and the actual exchange rate is 107.2. This index, therefore, tells us that the Japanese yen is undervalued by 36.3%, or 107.2-68.30.

This index can be used to compare currencies and used by investors to track economic differences in a country. Different situations in different countries could change the cost of a Big Mac.

Next time you have a burger, just remember that you’re taking a bite out of the world’s economy.

Photo courtesy of McDonald's.