No abstract

The Big Mac Index is a tool that makes exchange-rate theory more palatable. In recent years the Big Mac Index has been used as a practical way to determine the over- or under-valued international currencies according to the theory of Purchasing Power Parity. The theory uses the Big Mac as a tradable single-good basket to equalize the Dollar-value of the hamburger around the world through arbitrage. The enormous popularity of the Big Mac Index arose the questions of how effective the Big Mac price is as an indicator of income level and how accurate the exchange rate movement predictions are based on the Big Mac prices over time? The statistical analysis of this paper is implemented using data from 2013 to 2020 from The Economist and from the World Bank for 42 countries. US Dollar, Euro, British Pound, Chinese Yuan, and Japanese Yen are used as base currencies to track the dynamics of stability and convergence. As a qualitative indicator of movement in the nominal exchange rate, however, there is no significant difference in countries of different income levels and economic stability. The Big Mac Index estimation consists with previous studies in convergence for countries with high income level. Contradictory to previous studies, the Big Mac Index estimation tends to fluctuate for currency in country with high income level like US Dollar only in 2020. The stability of Big Mac Index dynamics from 2013 to 2020 holds for the rest of the other four currencies.