The Big Mac Index 21 Years On: An Evaluation of Burgereconomics
The Big Mac Index, introduced by The Economist magazine 21 years ago, claims to provide the “true value” of a large number of currencies. This paper assesses the economic value of this index. We show that (i) the index suffers from a substantial bias; (ii) once the bias is allowed for, the index tracks exchange rates reasonably well over the medium to longer term in accordance with relative purchasing power parity theory; (iii) the index is at least as good as the industry standard, the random walk model, in predicting future currency values for all but short-term horizons; (iv) future nominal exchange rates are more responsive than prices to currency mispricing, but this split is difficult to determine precisely. While not perfect, at a cost of less than $US10 per year, the index seems to provide good value for money.
|Date of creation:||2007|
|Contact details of provider:|| Postal: 35 Stirling Highway, Crawley, W.A. 6009|
Phone: (08) 9380 2918
Fax: (08) 9380 1016
Web page: http://www.business.uwa.edu.au/school/disciplines/economics
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:uwa:wpaper:07-23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Verity Chia)
If references are entirely missing, you can add them using this form.