Everyone knows McDonald's is represented in most countries of the world, and its signature Big Mac dish contains enough food ingredients (bread, cheese, meat and vegetables) to be considered a universal product. Its value in each country depends on the volume of output, rental price, raw materials, labor, and other factors, and the Big Mac index is the best way to see the mismatch in the value of currencies in countries with similar income levels.
The Big Mac Index was first introduced by The Economist in September 1986 in an article by Pam Woodall as a half-joking example and has been calculated and published by the magazine annually since then. Thanks to the "Big Mac Index" you can find out whether the fair present value of each particular currency, or whether it is overvalued or undervalued. How to calculate the Big Mac index? This is done very simply. Let's take the price of the most famous McDonald’s hamburger in one country, for example, in Russia, and in another country, for example, in the United States. It is known that in Russia the national currency is rubles, and in the US dollars. Here we are going to compare them. To begin with, we will divide the cost of a Big Mac in Russia by the cost of the same hamburger in the United States. Let's digress from the situation in the real world and suppose that in Russia this hamburger costs 100 rubles. And in the US $ 4.
We divide 100 by 4 and get 25. It turns out that the dollar is actually 25 times more valuable than the ruble. Next, we compare the exchange rates, from which we come to the conclusion - the ruble is overvalued or undervalued in relation to the US dollar. In such a simple way, you can compare the rates of currencies in completely different countries. Currency rates can be obtained online, and prices for hamburgers are available on the McDonald’s website.
Using the Big Mac index, you can also see how much a currency has depreciated over several decades. For example On the day of its birth in 1967, the Big Mac cost 47 cents. The following year, when it became the US National Standard, it was priced at 49 cents. In 1986, when The Economist began calculating the Big Mac Index, its price was already equal to $ 1.60. Now it costs 4.3 dollars in the US. This shows that in less than half a century, the dollar has depreciated almost 10 times.
The problem with the calculation before 2011 was with the currency of India. The fact is that Hindus do not eat bigmaks, which, as you know, include beef, because a cow is a sacred animal in this country. But since 2011, the creators of the index have made a compromise decision. Since in the price of a sandwich, according to their calculations, the cost of meat is no more than 10%, then the local chicken analogue - "Maharaja Mak" was taken as a basis.
Some economists went even further and proposed to convert the size of gross domestic product and the share of GDP per capita into big macs. This is how a whole section of semi-joking economics was born - "burgeronomics".