The Big Mac Index two decades on: an evaluation of burgernomics
Article first published online: 12 OCT 2010
Copyright © 2010 John Wiley & Sons, Ltd.
International Journal of Finance & Economics
Volume 17, Issue 1, pages 31–60, January 2012
How to Cite
Clements, K. W., Lan, Y. and Seah, S. P. (2012), The Big Mac Index two decades on: an evaluation of burgernomics. Int. J. Fin. Econ., 17: 31–60. doi: 10.1002/ijfe.432
- Issue published online: 29 DEC 2011
- Article first published online: 12 OCT 2010
- purchasing power parity;
- currency forecasts
The Big Mac Index, introduced by The Economist magazine more than two decades 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; and (iv) future nominal exchange rates are more responsive than prices to currency mispricing. While not perfect, at a cost of less than $US10 per year, the index seems to provide good value for money. Copyright © 2011 John Wiley & Sons, Ltd.