Faculty Mentor: Dr. Anne Donnelly and Michelle Leonard
College: Warrington College of Business
Since 1986, The Economist’s Big Mac Index (BMI) has served as a tool that allows individuals to understand exchange-rate differences and identify over and undervalued currencies based on the price of the Big Mac, in its respective form, in varying countries. The Consumer Price Index (CPI) is another index that aggregates and averages the price changes of predetermined goods. This research examined the relationship between the BMI and the CPI in Brazil, Russia, India, China, the European Union, and the United States from January 2006 to January 2020, with the goal of finding a correlation between the two. Using CPI data from the Federal Reserve Bank of St. Louis, BMI data from The Economist, and the Analysis Toolpak within Excel for data analysis, the Pearson’s correlation coefficient, the coefficient of determination, and linear regression equation were calculated for the BMI and CPI. Results demonstrated a favorable correlation between the two for the small sample of currencies tested. The results supported that the BMI is a useful tool, alongside the CPI, for aiding the average consumer in understanding exchange rates and currency valuations. Overall, the BMI and the CPI can be used to complement each other when examining a variety of economic environments.
Click the video below to view the student's poster pitch.
This is very interesting! How does the project take into account the socio-economic impact of the Big Mac. I understand that it is looking at the BMI, but wouldn’t price would also change depending on the social views of the big mac in each area and not just the cost of the burger?
Thank you so much for your question! It’s quite interesting how social views actually impact the price of the Big Mac and how it is analyzed in the Big Mac Index. A great example of this is in India. In India, where beef is not a meat that is consumed often, the Big Mac is made with chicken. The Economist’s math behind the Big Mac Index accounts for this substitution and allows for a uniform index to still be fabricated.
Really interesting research study. I was always under the impression that the Big Mac Index was just a ball park technique but your project definitely provides clarity on how accurate the index is across the globe. As far as a question I had, I was wondering if your group knew why the BMI and CPI were more closely related in Brazil, China, and the EU than in countries like India and Russia? What are some factors that affect this relationship?
Thank you so much for your question! It’s rather difficult to pinpoint exact reasons for the differences in these relationships, however, it is a mix of political, social, and economic factors all concurrently interacting. If you’d like to discuss more feel free to contact me at firstname.lastname@example.org.
Great poster! Just one question — if the BMI is used to evaluate exchange rates between countries, what is the explanation for some countries having a higher correlation than others with the index? Is the BMI the best way to evaluate differences between exchange rates?
Thank you so much for your question! To answer the first portion of it, the reason that certain countries have a higher correlation with the Big Mac Index lies in the different social, political, and economic structures of the countries. In regards to the second portion of your question, the Big Mac Index is another tool that is in the wheelhouse of financial analysts should they choose to utilize it. A major goal with this study was to motivate the idea that it is more than just a novelty.
Thank you for your questions. Like Alex said above it is difficult to pinpoint exactly why some values show stronger correlation than others because it depends on a mix of political, economic, and social factors. As for your second question I think it is difficult to say what is the best way to evaluate exchange rates exactly. However, the BMI is a good index to use as it is a similar product across countries being used to compare currencies.
You all are using the big mac as a measure to look at exchange rates and other consumer prices. However, I would argue that mc’donalds is the most formulaic business model to date, and they have their own process of setting Big Mac prices for different currencies and different economic systems. I was wondering if you could tell me their process in price setting for these different conditions? Do they use regional economic data, sales history, business intuition, algorithms or some combination of the latter? In essence, what measures does mc’donalds use to create the price of the big bam, the measure you are interested in?
Thank you so much for your question! It is difficult to predict what exact details go into McDonald’s pricing decision. However, given the Big Mac acts similarly to a basket of goods, we can assume that they review the cost of each individual part of the Big Mac (like the lettuce, hamburger, etc.) and compare it with the wealth of the average consumer to reach a final price that they change with trial and error (like if more customers buy it at a different price, they change the price). If you’d like to discuss more feel free to contact me at email@example.com.
Thank you for you question! The Big Mac index is an index created by the Economist, not by us. The reason the BMI works when comparing currency rates is because it acts as a market basket, since it contains a variety of goods such as meat, vegetables, and bread. Since the Big Mac is mostly the same in every country, it’s price would reflect the difference in the price of these goods in a country. The difference in price between the Big Mac in a country and the United States can then be compared to see if the currency is over or under valued based on the US dollar. Our research didn’t not really go into how the price of a Big Mac is set by McDonald’s but that is an example of possible future research.
I like how you describe up front what the BMI is and in the last section.- nice work.