Way back in 1986, the editor of The Economist had the brilliant idea to invent a Big Mac index, as a “light-hearted introduction to exchange-rate theory.” I first learned of the index roughly three years ago when I took an international economics course, and I thought it was rather ingenious. This year marks the 20th anniversary, so The Economist is looking back on the index:
The Big Mac index is most useful for assessing the exchange rates of countries with similar incomes per head. Thus, among emerging markets, the yuan does indeed look undervalued, while the currencies of Brazil, Turkey, Hungary and the Czech Republic look overvalued. Economists would be unwise to exclude Big Macs from their diet, but Super Size servings would equally be a mistake.
According to the latest edition of the index (May 22), the cheapest place in the world to buy a Big Mac is in China, where it costs just $1.31 USD. The most expensive place is Norway, at $7.09 USD. Here in Canada, we’re only four cents more expensive than our American counterparts, at $3.14 USD.
The index was never intended to be a precise predictor of currency movements, simply a take-away guide to whether currencies are at their correct long-run level. Curiously, however, burgernomics has an impressive record in predicting exchange rates: currencies that show up as overvalued often tend to weaken in later years.
I wonder if it will continue to be as successful in the next twenty years. In any case, I am sure it will continue to be one of the more interesting indexes that economics has produced.
Read: The Economist