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The Big Mac index

By Murray Bourne, 03 Jun 2007

big mac
A BIg Mac in Japan costs
280 yen, or US$2.31.

My sister-in-law is on her way to the UK. She asked a good question: "How much does one British Pound buy, anyway? How does it compare with the Australian dollar (currently worth about 41p, or 0.41 pounds)?"

I told her about the Big Mac index, which The Economist magazine suggests is a way to compare the actual value of currencies.

The says in The Big Mac Index article:

The Economist’s Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalise the price of a basket of goods and services around the world. Our basket is a burger: a McDonald’s Big Mac.

The rates as per Feb 2007 indicate that a Big Mac in Australia costs US$2.67. In Britain, a Big Mac costs US$3.90. So it means my sister-in-law will be forking out around 50% more of her Australian dollars than she would for similar items in Australia.

The article has the following disclaimer:

[The Big Mac index] is only a rough guide, because its price reflects non-tradable elements such as rent and labour.

Rough it may be, but it is valuable in determining the relative value of currencies.

See the 4 Comments below.

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