Updated: Feb 23, 2021
For some people its just a joke, for The Economist, the famous newspaper, its a lighthearted guide to whether currencies are at their “correct” level based on the theory of purchasing-power parity (PPP). They never intended to have discovered the perfect tool to evaluate currency misalignment. The Economist says it's merely a tool to make exchange-rate theory more ...digestible.
1) Why the Big Mac?
The index takes his name from MacDonald's' well known Big Mac burger. The Big Mac was chosen because it is available to a common specification in many countries around the world.
2) Big Mac index - Methodology:
"The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued."
3) Limitation in the theory:
For the specialists, like you probably are, there is bias in this theory. Indeed, the average burger prices are cheaper in poor countries than in rich ones because of the labour costs, which is critically lower.
Beside The Economist Big Mac Index, UBS Research has expanded the idea including the amount of time that an average worker in a given country must work to earn enough to buy a Big Mac. The working-time based Big Mac index might give a more realistic view of the purchasing power of the average worker, as it takes into account more factors, such as local wages.
For example : In NY it's 15 min working time to buy a Big Mac and in Istanbul approximatively 1 hour on average (UBS Big Mac)
In the following chart you'll find the result of the BMI's price by country updated in January 2020. In other words on the right side you can see by countries if the price of a Big Mac is under or overvalued against the price in the US.
Countries where Big Macs cost less than in the United States (in US$ terms) have weak currencies, and those where they are more expensive have overvalued currencies. Considering that Index, Swiss franc was considered overvalued by 2,8 % against the USD and Euro undervalued by 2,7% in January 2020.
6) From Big Mac to Iphone Index:
UBS is chasing the price of the most creative index, and created recently the Iphone version of the Big Mac index. In their price and earnings report published every 3 years they enlightened us on the working time to buy an Iphone. You'll find bellow the last version regarding the Iphone X and their Big Mac Index from 2018.
7) UBS - Methodology :
UBS analyse the price of an Iphone and The Big Mac in a given city. They put those data in comparison with an average salary accross 15 representative professions (eg: Doctor; Product Manager; Secretary; Nurse etc).
Without any surprise working in Big Apple or in Zurich will be the fasted way to acquire one of the most popular smartphones. As you can observe, the results are slightly different if you are in the position of a fast food consumer in comparison with the high tech one. Due to the prize and the cost of living, we can easily imagine that in Cairo people will prefer to eat a burger instead of eating a virtual apple...
8) What about Brussels and Milan ?
And last but not least, because most of my followers are from Belgium and Italy, these are the figures you probably want to know regarding your city. Brussels and Milan are ranked very closely in the UBS index.
It takes for both of them 26 minutes of their working time to buy a Big Mac. Your hard work will be rewarded after 106 hours in Lombardia and after 138 hours in the Capital of Europe in order to buy the Iphone X.
These are probably the most popular indexes with several biases. But thanks to UBS & The Economist they succeed to present figures that everyone can easly understand.