The Big Mac Index
I would like to analyze The Big Mac Index in European region. I chose 5 currencies: Euro, Sterling, Swiss franc, Zloty and Kroner. Let us have a look on Big Mac prices in each of the country from 2012 to 2016.
Euro area
As it can be seen from this table, raw index was always undervalued – the Bic Mac price in euro was lower than in dollar. It means that the euro currency is overvalued against the dollar. Moreover, we may conclude that the euro is not a very stable currency because the price for Bic Mac changes every year. In Figure 1, we may visualize the exchange rate between euro and dollar and its modifications during the period.
Figure 1. Euro Area; D.H. & R.L.W;The Big Mac index, Global exchange rates, to go; The Economists, 2 Jan, 2016. Web; 20 May 2016.
The median data was in 2014 – 7,3%
The mean is (5.6+11,7+7,3-11-18,9)/5= -5,3% (0,053)
Standard Deviation:
(0,056+0,053)2 =0,01
(0,117+0,053)2= 0,03
(0,073+0,053)2=0,02
(-0,11-0,053)2=0,03
(-0,19-0,053)2=0,06
Σ = 0,01+0,03+0,02+0,03+0,06 = 0,15
St.Dev.= 0,17
United Kingdom
Figure 2. United Kingdom; D.H. & R.L.W;The Big Mac index, Global exchange rates, to go; The Economists, 2 Jan, 2016. Web; 20 May 2016.
Minimum - -11,8% (-0.118)
Maximum – 2,7% (0,027)
Median – 0,1% ( 0,001)
Mean = (-3,8-2,7+0,1-8,8-14,4)/5= - 5,92% (0,0592)
Standard Deviation:
(-0,038-0,0592)2 = 0,009
(-0,027-0,0592)2 = 0,007
(0,1-0,0592)2 = 0,002
(-0,088-0,0592)2 = 0,022
(-0,144-0,0592)2 = 0,007
Σ = 0,009+0,007+0,002+0,022+0,007= 0,047
St.Dev. = 0,217
Switzerland
The most important information from Table 3 is that the price for Bic Mac in Swiss frans from 2012 to 2016 was equal. The Swiss economy demonstarates the most stable position comparing with other counrties from this report. The different percentage of valuation,in its turn, means the dollar exchange rate changes during this period. Especially it is true for the last two years of 2015 and 2016. Swiss franc is overvalued agains dollar with the largest percentage from the above list.
Figure 3. Switzerland; D.H. & R.L.W;The Big Mac index, Global exchange rates, to go; The Economists, 2 Jan, 2016. Web; 20 May 2016.
Maximum – 63,1% (0,631)
Minimum – 30,7% (0,307)
Median – 54,5% ( 0,545)
Mean = (62,1+63,1+54,5+57,5+30,7)/5= 53,58% (0,536)
Standard Deviation:
(0,621-0,536)2 = 0,007
(0,631-0,536)2 = 0,009
(0,545-0,536)2= 0,000081
(0,575-0,536)2 = 0,002
(0,307-0,536)2 = 0,05
Σ = 0,007+0,009+0,000081+0,002+0,05= 0,068
St.Dev. = 0,26
Poland
Figure 4.Poland; D.H. & R.L.W;The Big Mac index, Global exchange rates, to go; The Economists, 2 Jan, 2016. Web; 20 May 2016.
Maximum – -39,2% (-0,392)
Minimum – -51.9% (-0,519)
Median – -35,2% ( -0,352)
Mean = (-38,4-32,6-35,2-48,2-51,9)/5= -41,26% (-0,413)
Standard Deviation:
(-0,384+0,413)2 = 0,0008
(-0,326+0,413)2 = 0,008
(-0,352+0,413)2= 0,004
(-0,482+0,413)2= 0,005
(-0,519+0,413)2 = 0,011
Σ = 0,0008+0,008+0,004+0,005+0,011= 0,029
St.Dev. = 0,17
Norway
Figure 5. Norway; D.H. & R.L.W;The Big Mac index, Global exchange rates, to go; The Economists, 2 Jan, 2016. Web; 20 May 2016.
Maximum – 79,6% (0,796)
Minimum – 5,8% (0,058)
Median – 31,5% ( 0,315)
Mean = (61,7+79,6+68,6+31,5+5,8)/5= 49,44% (0,494)
Standard Deviation:
(0,617-0,494)2 = 0,02
(0,796-0,494)2 = 0,09
(0,686-0,494)2= 0,04
(0,315-0,494)2 = 0,03
(0,058-0,494)2 = 0,19
Σ = 0,02+0,09+0,04+0,03+0,19= 0,37
St.Dev. = 0,61
In conclusion, I would like to say that despite of its simplicity the Big Mac Index is not very reliable. First of all, Big Mac differs in different country by size, ingredients and other. Moreover, salary for those you cook and sell Big Mac is also dependent on the country. In this case, the Big Mac index does not have much value for the market because of its sketchy results.
References
D.H. & R.L.W. The Big Mac index, Global exchange rates, to go. The Economists, 2 Jan, 2016. Web. 20 May 2016. <http://www.economist.com/content/big-mac-index>.
