The Big Mac index was introduced by The Economist magazine in 1986, as a playful example to introduce the concept of purchase power parity (PPP) and under/overvaluation of currencies. The PPP rates are usually compiled based on consumer baskets of comparable quality. The problem is that goods in different economies are hardly comparable. The customer basket contains only one good which is made everywhere in exactly the same way – McDonald’s Big Mac. You might think that is an oversimplification, but in fact the Big Mac Index has been widely used for comparing currencies ever since it was first published. Explore the concept behind the Big Mac index and critically assess the importance of comparability of goods in various economies.
The Big Mac index was introduced by The Economist magazine in 1986, as a playful example to introduce the concept of purchase power parity (PPP) and under/overvaluation of currencies. The PPP rates are usually compiled based on consumer baskets of comparable quality. The problem is that goods in different economies are hardly comparable. The customer basket contains only one good which is made everywhere in exactly the same way – McDonald’s Big Mac. You might think that is an oversimplification, but in fact the Big Mac Index has been widely used for comparing currencies ever since it was first published. Explore the concept behind the Big Mac index and critically assess the importance of comparability of goods in various economies.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The Big Mac index was introduced by The Economist magazine in 1986, as a playful example to introduce the concept of purchase power parity (PPP) and under/overvaluation of currencies. The PPP rates are usually compiled based on consumer baskets of comparable quality. The problem is that goods in different economies are hardly comparable. The customer basket contains only one good which is made everywhere in exactly the same way – McDonald’s Big Mac. You might think that is an oversimplification, but in fact the Big Mac Index has been widely used for comparing currencies ever since it was first published.
Explore the concept behind the Big Mac index and critically assess the importance of comparability of goods in various economies.
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