Big Mac Index

When designing products for the world markets, you sometimes need hard figures about the income level of your target markets. It can be quite time consuming to gather this type of information. Here I will be presenting you an idea for a first approach, which you can use, to retrieve an estimate of this information.

Purchasing Power Parity (PPP)

When travelling abroad, you probably have already observed that you can buy more goods for your money in one country, and in the other country, you can buy less. Responsible for this fact are the following circumstances:

The exchange rates between two currencies may differ from the exchange rate between other currencies.
The price level in a country may differ from the price level in a different country.

The Purchasing Power Parity is a means to measure differences in the price level accross countries. To identify overvalued and undervalues currencies, you need to compare the exchange rates.

Big Mac Index

Most of you might know that the fast food chain McDonalds is represented in very many countries. In each of these countries, this company positions its products in a certain price range, and it offers very standardized products accross the globe. Originally, The Economist had the idea to collect worldwide price information for the Big Mac (one of Mc Donalds products) in local currencies, and to calculate the dollar value of these figures. With these calculations, it is possible to find a first estimate of the purchasing power of a country, and it is possible to get an idea about the valuation of different currencies.

Using the Big Mac Index together with time series, such as GNP (Gross National Product), Household Income, etc., you have a first estimate at hand of the situation in a foreign market.

Further Information

Wikipedia: The → Big Mac Index
The Economist (mostly paid articles): → Special Big Mac Site

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