Defining the term
The following report discusses in brief about the “Big Mac Index”. The report will discuss about the evolution of the concept, the methods based on which the following concept works and the limitations of using the same (Lewis, 2015). The concept can be defined as measuring the purchasing power parity in the most informal way possible. It is carried out between two contrasting money and then provides an analysis in order to determine to what level the exchange of the rates in the market leads to goods costing the same price in different countries of the world.
The Big Mac Index which is also known as Big Mac PPP is a type of survey that was conducted by The Economist magazine in border to measure the Purchasing Power Parity between the nations of the world (Atal, 2014). The survey was carried out and used the price of the Big Mac burger that is made by the world’s leading food brand, McDonald’s as the bench mark. The magazine took the idea form the PPP as defined in the discipline of economics, which can be defined as the changes that are brought about in rates of exchanges between different nations of the world would further be seen in the change that is brought about in the prices in a large volume of commodities, that would remain constant across all the borders. As per the theoretical view of Big Mac Index, any variations in the rates of conversations between the bills shall impact the price of the customers are paying for a Big Mac in specific nation, substituting the “basket” with the “hamburger” from the house of McDonald’s (O’Brien & de Vargas, 2017).
The index was introduced during the month of September, in the year 1986 by the Economist magazine and introduced it as a method that would seek to make the exchange rates theory that could be more digestible by the consumers globally. It provides a brief and compact view of the markets of the world which are deviating from the true values of the rates of exchange. The theory of the Big Mac has been introduced on the principle that “a dollar should buy the same the amount in all countries” (Danger et al., 2016). For instance, considering the price of a Big Mac is 4.00 USD in the United States as compared to 2.5 pounds in the nation of Great Britain, it is expected theta the rate at which it can be exchanged would be 1.60 (4/ 2.5=1.60). The increase of the conversation rate of the dollars to that of the pounds, the Big Mac Index would be stating the same as the pound to be overvalued, if the rate drops down, the pound will be stated to be undervalued.
Practice of the Big Mac Index
The price of the big Mac is decided by the organization of its production, MacDonald’s Corp and it affects the Big Mac Index greatly. The ingredients, availability and size of the Big Mac also varies in different nations of the world. It is for this reason, the index is considered to be very light hearted in nature and is used by most of the schools and universities to teach the students regarding the concept of PPP (Abdel-Rahman, et al., 2015). In case of the Big Mac index, the basket represents the Big Mac burger, which is one of the famous productions of the famous McDonald’s that are sold in almost 120 nations of the world. This had been chosen as it applies to all common specifications in most of the countries with the franchises of the organization that is available locally and having significant responsibilities for further consultation with the input prices. This index enables a comparison between the different currencies that are particular in different nations of the world (Bondia-Pons, et al., 2014)
Like all other theories, there are certain limitations to this index as well. While the economists from all over the world are of the opinion that the Big Mac Index is a reasonable system of measuring the purchasing power of the real world, the burger methodology began to show some limitations. Comparison of the prices of the Big Mac in different nations of the world, it has been assumed that the value of the consumers is similar all over the globe (Ghahari et al., 2013). However in certain nations of the world, the associations with the junk food manufacturing organizations of the United Sates are better compared to the other nations. The number one spot in the country of Switzerland is has no enormous amazement and the American affiliation is not negative and at whatever point one have endeavored to shop or eat around in Zurich – attempt the territory around Paradeplatz where the two major banks have their private saving money and the command is passed down from the central and the price of every stuff are very costly (Bauer et al., 2013). When all the stuffs of a particular nation is very costly, the Big Mac is also very costly in a nation that has some expertise in giving administrations to individuals that bring cash. Frequently they touch base with trade out their own particular cash, at that point make an interpretation of that into Swiss Francs (i.e. interest for the Swiss money), and regard their Swiss trek as a sort of ‘valuable occasion’. Moreover, the country of Switzerland is one of those nations that follow a tax system with a high rate of direct taxes such as VAT and levies on goods and services and a comparative low percentage of the indirect taxes (Phillips & Hardy, 2013).
Limitations
However, in some of the countries, especially in the third world countries of the world such as that of India, consumption of food in an international fast-food chain is more expensive compared to the consumption of food in a local eatery store while the appeal for the Big Mac is not at all high in these nations as in the United States (Laframboise et al., 2014). Social status of the people in these nations of consuming food at fast food eatery shops such as McDonald’s in the nearby markets, extent of the offers, the taxes, levels of competition and the import taxes on selected items are capable of representing the economy of the whole country. In addition to this, there is no theoretical evidence to that is capable of explaining the reason behind the equality of the goods and services that can be traded such as the costs of properties in all the nations of the world. The relative costs of the products that have more profit such as essential products from the pharmaceutical firms might contrast neighborhood limit and eagerness with pay, as much as relative cash esteems.
In any case, McDonald’s is likewise utilizing distinctive business methodologies which can result in gigantic contrasts for an item. Generally speaking, the cost of a Big Mac will be an impression of its neighborhood creation and conveyance cost, the cost of publicizing (significant in a few regions), and in particular what the nearby market will bear — very unique in relation to nation to nation, and not each of the an impression of relative money esteems ((Phillips & Hardy, 2013). In some markets of the world, a high-volume and low-edge approach bodes well to augment benefit, while in others a higher edge will produce more benefit. In this way the relative costs reflect more than cash esteems. For instance, the cost of a hamburger is €1 in France, and €1.50 in Belgium, but the rates of McDonald’s products are far cheaper in Belgium. Prices of Big Macs do vary greatly even within a particular country, for instance, the price of Big Mac is more in the city of New York but is cheaper in a rural area (Thomson et al., 2015).
Another example regarding the prices of the Big Macs is in the country of Russia. The prices of the Big Macs are quite cheap in the country, even though the capital city of the country of Russia, Moscow belongs to the top of the lists for higher prices of the Big Macs. Standard ingredients of food are cheap in the country while the restaurants that are suitable for the purpose of commencing business dinners, employing the staffs who are quite fluent in English are quite expensive (Qin et al., 2013). Geographical coverage is another limitation of the Big Macs, which is due to presence of the franchise of McDonald’s. For example, in the whole continent of Africa, the franchise of McDonald’s is only present in Morocco, Egypt and South Africa. There is a similar index created solely for the continent of Africa, named as KFC Africa. As per the name, the continent does not use the Big Macs, instead they uses the KFC’s Original 12/15 pieces bucket to evaluate the data.
The most common and easiest way to solve the problem caused due to the index is can be sorted by analyzing the economic structure of different nations of the world, especially those of the third world countries and to classify the Big Macs accordingly. The economic experts can also adopt the way and segregate the Big Macs in the name of different countries so that it reduces confusion among them.
Conclusion
The statements and the above discussions about Big Mac index regarding the sorting process and according to the economic structure of the countries depend on the perspective of whom the decision has been made. In the case of Big Mac, it is the best to adopt the process of segregation after focusing on the economic structure of the countries
References
Abdel-Rahman, M., Ilahi, S., Zia, M. F., Alduraibi, M., Debbar, N., Yacoubi, N., & Ilahi, B. (2015). Temperature coefficient of resistance and thermal conductivity of Vanadium oxide ‘Big Mac’sandwich structure. Infrared Physics & Technology, 71, 127-130.
Atal, V. (2014). The Big Mac Index and real-income disparity.
Bauer, A., Jaulmes, E., Prouff, E., & Wild, J. (2013, February). Horizontal and vertical side-channel attacks against secure RSA implementations. In Cryptographers’ Track at the RSA Conference (pp. 1-17). Springer, Berlin, Heidelberg.
Bondia-Pons, I., Maukonen, J., Mattila, I., Rissanen, A., Saarela, M., Kaprio, J., … & Pietiläinen, K. H. (2014). Metabolome and fecal microbiota in monozygotic twin pairs discordant for weight: a Big Mac challenge. The FASEB Journal, 28(9), 4169-4179.
Danger, J. L., Guilley, S., Hoogvorst, P., Murdica, C., & Naccache, D. (2016). Improving the big mac attack on elliptic curve cryptography. In The New Codebreakers(pp. 374-386). Springer, Berlin, Heidelberg.
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Lewis, M. (2015). The big short: Inside the doomsday machine (movie tie-in). WW Norton & Company.
O’Brien, T. J., & de Vargas, S. R. (2017). The Adjusted Big Mac Methodology: A Clarification. Journal of International Financial Management & Accounting, 28(1), 70-85.
Phillips, B., & Hardy, B. (2013). Android Programming: The Big Nerd Ranch Guide. Pearson Education.
Qin, W., Zhang, J., Li, B., & Sun, L. (2013). Discovering human presence activities with smartphones using nonintrusive wi-fi sniffer sensors: the big data prospective. International Journal of Distributed Sensor Networks, 9(12), 927940.
Thomson, J. R., Maron, M., Grey, M. J., Catterall, C. P., Major, R. E., Oliver, D. L., … & Robinson, D. (2015). Avifaunal disarray: quantifying models of the occurrence and ecological effects of a despotic bird species. Diversity and Distributions, 21(4), 451-464.
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