The Big Mac Index Research Paper

Managerial Economics and Quantitative Methods

Final Examination

Boris Ilic, [e-mail]

-The Big Mac Index -

The Big Mac Index was devised by Pam Woodall of the Economist in 1986, a light-hearted guide to whether the currencies are at their “correct” level. It is based on one of the oldest concepts in International Economics, purchasing power parity PPP, the notion which says the dollar should buy the same amount of goods in all countries. Over the long-term currency exchange rates should equal the price of a basket of goods and services in different countries, presuming markets are functioning properly. (R.L.W., 2018)

The reason Big Mac was used for this index since it is locally produced

The resulting value is then compared to the official exchange rate between the two currencies to determine if either currency is undervalued or overvalued according to the PPP theory.

Based on the example below and using figures from July 2008 (Wikipedia, n.d.)

 the price of a Big Mac was $3.57 in the United States

 the price of a Big Mac was £2.29 in the United Kingdom

 the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56

 this compares with an actual exchange rate of $2.00 to £1 at the time

 (2.00-1.56)/1.56 = 28%

 the pound was thus overvalued against the dollar by 28%

Even though Big Mac index was invented as a semi-humorous index and it is light-hearted in its essence, it can however provide good overview for Investors which they can use in many different ways, ranging from determining rates of inflation to comparing currency valuations.

It worth noting though that Big Mac index is mainly useful when comparing countries which are on the same or similar level of economic development whereas in reality is not useful at all.

I’ll try to explain Asymmetric Information from my stand point as an Account Portfolio Manager in IBM.

IBM is well established IT Company present on the market for more than 100 years, considered as a pioneer of new technologies, “blue giant” and in overall a trusted player in plethora of other IT companies.

I’m of the opinion that if there’s an industry where the gap between the “buyer & seller” in terms of asymmetric information is the narrowest than that must be an IT industry due to abundancy of information available online and various benchmarking tools which are playing pivotal role in narrowing this gap.

But even in this “almost perfect” scenario for customers, the needle on asymmetric information gauge can lean toward provider of IT products when there’s a new product introduction to the market and there are no benchmarking in place nor “word of the mouth” experience.

This is where the relationship between provider and customer steps in and brand name plays major role in helping to “seal the