Forget The Exchange Rate — Check The Big Mac Index

Tuesday, May 18, 2010

There’s been alot of talk lately about the drop of the euro against the dollar. On Monday, the euro dropped to a four-month low, ending the day at $1.23, and analysts are predicting it could go lower, perhaps even dipping below $1.20 in the next few weeks. So what does this mean for a Yank heading to Europe this summer?

Well, it’s certainly going to be cheaper than what it has been for the last few summers when the Euro ranged anywhere from $1.40 to $1.60. But what does that mean exactly? How much cheaper? Am I finally able to upgrade from that hostel bunk to the Mandarin Hotel with my valuable greenback? So long Ramen, hello foie gras? How many question marks can one paragraph have?

One of the best ways to figure out how far your money’s going to go, no matter where you go, is what is called The Big Mac Index. This index, which was introduced by The Economist in 1986, compares prices of Big Macs in various countries against the dollar, thus showing its purchase power in that particular country (and also showing how that exchange compares to its actual exchange rate). So what’s it say now?

The Economist’s most recent Big Mac Index showed that, given the exchange rate, it only takes $1.83 to buy a Big Mac in China (it costs about $3.58 in the United States). As expected, the closest cheapest countries were all in Southeast Asia, including Malaysia ($2.12) Thailand ($2.16) and Indonesia ($2.28).

At the other end of the spectrum is Norway, where it costs a whopping $6.87 for the classic burger, and $6.16 in Switzerland. On March 17, when the Euro was $1.37, a Big Mac cost about $4.62 using the euro. But given the roughly 11% drop over the last couple months, that same Big Mac now costs only $4.14.

And now to take this analysis one step further and answer what we’re all wondering. For that same Big Mac to cost the same in both the euro and dollar, the euro would need to fall another 14%, down to about $1.06.

My head now hurts. Please feel free to e-mail any mathematical corrections to me. Be kind.

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