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Forum 2 - Big Mac Index
International Business (Liberty
University)
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Running head: FORUM 2 – Big Mac Index 1
BUSI604: Forum 2 – Big Mac Index
Brian D. Smith
Liberty University
Dr. John Karaffa
January 31, 2021
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FORUM 1 – Big Mac Index 2
Forum 2
Key Term and Why You Are Interested in
It
After reading the textbook, I decided I wanted to learn more about the Big Mac Index. It
was interesting learning
about how something so simple as a Big Mac is used to determine the foreign exchange
rate throughout the world. “Invest your money in foreign trade, and one of these days you will
make a profit” (Good News Translation, 1992, Ecclesiastes 11:1). I have lived and worked in
multiple countries and for personal and investment reasons, I have always wondered what
metric was used to determine the valuation of that country’s currency and how the exchange rate
was determined. According to (Satterlee, 2018), the Big Mac Index is a method used to not only
determine individual purchasing power of an economy, but also if a country’s currency was over
or undervalued. Until now, I never knew it was the Big Mac that helped make that
determination.
Explanation of the Key Term
In 1986, a weekly magazine call the Economist published a guide to see if currencies are
at their correct level and the guide used the Big Mac as the universal reference. While it was
never intended to be used seriously, it has now become the standard to which the world
currencies and exchange rates are based upon[ CITATION The21 \l 1033 ]. This is done by
measuring each currency against a common standard – the Big Mac. Being that you can get a
Big Mac anywhere in the world, it can be considered a standardized product across the world.
The premise is that the Big Mac should cost relatively the same in every country. The difference
in
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the cost of a Big Mac is U.S. dollars compared to another country would show the differences in
the purchasing power of that country’s currency[ CITATION Sta21 \l 1033 ].
Major Article Summary
The major article that was selected for the Big Mac Index was, “Does BIGMAC Index
Consider as a Substitute for Inflation Rate”, [ CITATION Yas19 \l 1033 ]. The article speaks on
the origins of the Big Mac Index and its intended purpose. While initially, the Big Mac index
(BMI) or burgernomics as its also affectionately known, was never intended to become the
standard for exchange rates and determining purchasing power parity (PPP), the index has now
become a popular example of the principles of PPP, as it appears in almost all current textbooks
of international economics and finance[CITATION Jia21 \l 1033 ]. It was basically created as a
joke by the Economist to be used as a guide to discover if the world’s currencies are valued
correctly or incorrectly and used as a tool to and make the exchange-rate theory understandable
[ CITATION Yas19 \l 1033 ]. During the time the Big Mac Index was created, the exchange
rate had no real standard to determine if the currencies were correct or how to value a country’s
PPP. When discussing the PPP, which is used to guess what the exchange rate would have to be
between two counties for the each to be in aligned within each respective country’s purchasing
power. For example, a Big Mac might cost $5.10 in the U.S and the same Big Mac costs 50000
Indonsian Rupiah, the BMI and terms of actual purchasing power would translate to having $5 in
Indonesia would be the same as having $9.87 in United States. This means the Indonsian Rupiah
is undervalued. However, the article also goes great lengths to show the true purpose of the PPP
exchange rate was used to reduce unfair and unrealistic comparisons for international markets
and their exchange rates. Right now, it would be unfair to compare the economies of the U.S
and
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Indonesia and expect the same results. The international BMI implicitly assumes that all the
countries in the sample have similar cost structure, which in many cases is not true or
realistic[ CITATION Lov16 \l 1033 ]. Towards the end of the article, Yasser, Mussad, & Sanad
(2019), go into the limitions of the BMI, which include not taking into account of a country’s
economic condition which can be misleading when calculating the BMI. Very important factors
such as cost of transportation, taxes, and tariffs are not included in the BMI. The conclusion of
the article explains how the BMI is a very useful tool and financial experts and speculators
should use it as one of the may tools available while breaking down international markets, but
due to the limitations, “it cannot be used as the only indicator to forecast a country’s economic
conditions"[ CITATION Yas19 \l 1033 ].
Discussion
A. Cited Work Relationship to Major Summary and Assigned Readings
As the text continued to explore the phenomenon of international business, the assigned
chapters also exposed the corruption and multiple risks associated with engaging in business
internationally. The shear competitiveness of rival countries and the opportunity to overvalue or
undervalue a country’s currency is too great to ignore. The BMI provides a standard for
governments to use to ensure and gage the “fairness” in the international markets. By using a Big
Mac to be a standardized commodity, one can loosely base a country’s PPP. However,
Yang (2004) explains, there are constant deviations that occur with the Big Mac index.
He gives four factors for the deviations which are the existence of barriers to trade; the inclusion
of nontraded elements in the cost of a Big Mac; imperfect competition, and the existence of
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current account imbalances. As the cited works and major article explains, this is just one avenue
to use, but cannot be the sole avenue, as other factors, which are left out of the BMI, need to be
addressed when trying to understand another country’s economy.
B. Cited Work Relationship to the Other 4 Articles
How the cited work relates to the other 4 works you researched. This part of your thread
provides evidence that you have refined your research key term to a coherent and specialized
aspect of the key term, rather than a random selection of works on the key term. The idea here is
to prove that you have focused your research and that all works cited are related in some manner
to each other rather than simply a collection of the first 5 results from your Internet search. (150
words minimum.)
All references must be in APA format. Entries are organized alphabetically by surnames of
first authors and are formatted with a hanging indent. Most reference entries have three
components:
1. Authors: Authors are listed in the same order as specified in the source, using
surnames and initials. Commas separate all authors. When there are seven or more
authors, list the first six and then use “et al.” for remaining authors. If no author is
identified, the title of the document begins the reference.
2. Year of Publication: In parenthesis following authors, with a period following
the closing parenthesis. If no publication date is identified, use “n.d.” in
parenthesis following the authors.
3. Source Reference: Includes title, journal, volume, pages (for journal article) or title, city
of publication, publisher (for book).
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References
Anderson, C. (2003). The impressive psychology paper. Chicago: Lucerne Publishing.
General Electric. (2012). 2011 annual report. Retrieved March 22, 2012, from the
General
Electric website: http://www.ge.com/ar2011/index.html
Satterlee, B. (2009). Cross border commerce. Roanoke, Virginia: Synergistics Publishing.
Smith, M. (2001). Writing a successful paper. The Trey Research Monthly, 53(1), 149-
150.
