With International Relations being one of Tufts’s most popular majors, odds are most Jumbos have had at least some exposure to basic economic principles. But whether you’re an econ-savvy Jumbo or one who chose another path, you’re bound to enjoy Tufts Economics Society’s new blog. In it, they discuss the current economic climate, things they learn in their classes, and musings on how economics affect our daily lives. Pierre Chalon, A14, wrote one of these posts and chose to focus on the Big Mac Index, common knowledge in the world of economics that simplifies our understanding of exchange rates.
“Here’s the interesting part. To simplify this theory and make it more accessible to people not necessarily knowledgeable about currency fluctuations, in 1986, The Economistmagazine published the ‘Big Mac Index,’ essentially a data table with prices of a single Big Mac burger in many countries in local currencies. The idea was to make the basket of goods merely a McDonald’s Big Mac burger so as to determine whether currencies were being over or under valued. How? Let me give an example. Let’s say the average Big Mac in America costs US$3.22 and 509 Kronur in Iceland (US$ 7.22 at the market exchange rate). This implies a PPP of 158 Kronur for a dollar (where they would equalize). We then compare the exchange rate of the currencies to the cost of a Big Mac to see where it would be cheaper overall to buy it. In this case, the actual dollar exchange rate is 68.4, meaning that the Icelandic krona is currently being over-valued by 131% and it should (in theory), depreciate against the US dollar.