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

Kenneth Clements, Yihui Lan and Shi Seah
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Yihui Lan: UWA Business School, The University of Western Australia
Shi Seah: UWA Business School, The University of Western Australia

No 07-23, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

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.

Pages: 76 pages
Date: 2007
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