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The Big Mac Index 21 Years On: An Evaluation of Burgereconomics

Author

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  • Kenneth W. Clements

    (UWA Business School, The University of Western Australia)

  • Yihui Lan

    (UWA Business School, The University of Western Australia)

  • Shi Pei Seah

    (UWA Business School, The University of Western Australia)

Abstract

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.

Suggested Citation

  • Kenneth W. Clements & Yihui Lan & Shi Pei Seah, 2007. "The Big Mac Index 21 Years On: An Evaluation of Burgereconomics," Economics Discussion / Working Papers 07-23, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:07-23
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    File URL: https://www.business.uwa.edu.au/school/disciplines/economics/?a=98670
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    Cited by:

    1. Andreea-Daniela GANGONE & Mariana-Cristina GANESCU & Mihaela ASANDEI, 2018. "An Analysis Of The Effect Of Purchasing Power Parity On National Competitiveness And Human Development In 21 European Countries," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 3(1), pages 152-165.
    2. Maxwell N. Maesepp, 2009. "Postage Price Parity," Economic Papers, The Economic Society of Australia, vol. 28(2), pages 169-175, June.

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