Purchasing Power: The Economist
Go to The Economist website and search for the Big Mac Index for a recent time period. Compare the Purchasing Power of the United States with another country. Try to choose a country with which you are not very familiar. What does this parity say about the potential standard of living in the country you chose? What does it say about the potential wage level?
How to Find and Analyze the Big Mac Index
- Visit The Economist Website: Go to The Economist’s website and search for “Big Mac Index.” The latest report will provide the most recent data on purchasing power parity (PPP) based on the price of a Big Mac in various countries.
- Select a Country for Comparison: Choose a country from the list that you are not very familiar with. For example, let’s say you select India.
- Compare the Index Values:
- Find the Local Price of a Big Mac: Note the price of a Big Mac in the country you chose (e.g., India).
- Find the U.S. Price: Note the price of a Big Mac in the United States.
- Calculate the Implied Exchange Rate: Divide the price of the Big Mac in the local currency by the price in the U.S. dollars to get the implied exchange rate.
- Determine the Over/Under-Valuation:
- Compare the Implied Exchange Rate: Check the actual exchange rate between the two currencies. The difference between the implied exchange rate and the actual exchange rate indicates if the local currency is overvalued or undervalued relative to the U.S. dollar.
Interpreting the Big Mac Index
1. Standard of Living:
- If a Big Mac is significantly cheaper in the country you chose compared to the U.S., it often suggests that the cost of living is lower in that country. This can indicate a lower standard of living in terms of purchasing power.
- For instance, if a Big Mac in India costs significantly less than in the U.S., this generally means that goods and services are cheaper in India, reflecting lower overall living costs.
2. Wage Levels:
- Lower prices for a Big Mac in a country with lower wages typically indicate that wages are lower in purchasing power terms. This is because the cost of living (and therefore wages) is lower.
- If the Big Mac is undervalued in terms of the local currency, this often implies that wages in that country might be lower, as the local purchasing power is less compared to the U.S.
Example Analysis
If the Big Mac costs $6 in the U.S. and ₹200 in India, you would:
- Calculate the implied exchange rate: ₹200 / $6 = ₹33.33 per USD.
- Compare this to the actual exchange rate. If the actual rate is ₹80 per USD, the Indian rupee is undervalued relative to the dollar.
This undervaluation could suggest that while the cost of living in India is lower, the standard of living might also be lower, and wages are likely lower as well. The lower cost of a Big Mac indicates that purchasing power in India is less compared to the U.S. For the most accurate and specific insights, refer to the latest Big Mac Index data on The Economist’s website and use the exact figures for your comparison.