The Big Mac Index two decades on: an evaluation of burgernomics

Clements, Kenneth W.; Lan, Yihui; Seah, S.

doi:10.1002/ijfe.432

Cited by 25 publications

(5 citation statements)

References 29 publications

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“…We also substantially extend Lan (2006) by introducing the idea of real-time forecasts whereby the horizon is not restricted to be integer, as well as providing a comparison of the Big Mac and CPI approaches to currency forecasts. Recent contributions to the literature on Burgernomics include Chen et al (2007), Clements et al (2009), Cumby (1996, Lan (2006), Ong (1997, and Parsley and Wei (2007). For reviews of the whole PPP area, see the surveys by Froot and Rogoff (1995), Lan (2002), Lan and Ong (2003), Rogoff (1996), Sarno and Taylor (2002), Taylor and Taylor (2004), and Taylor (2006).…”

Section: Introductionmentioning

confidence: 99%

A new approach to forecasting exchange rates

Clements¹,

Lan²

2010

Journal of International Money and Finance

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a b s t r a c tBuilding on purchasing power parity theory, this paper proposes a new approach to forecasting exchange rates using the Big Mac data from The Economist magazine. Our approach is attractive in three aspects. Firstly, it uses easily-available Big Mac prices as input. These prices avoid several potential problems associated with broad price indexes, such as the consumer price index used in conventional PPP studies. Secondly, this approach provides real-time exchange-rate forecasts at any forecast horizon. These high-frequency forecasts could be appealing to those who want up-to-date exchange-rate forecasts. Finally, as our forecasts are obtained through a simulation procedure, estimation uncertainty is made explicit in our framework that provides the entire distribution of exchange rates, not just a single point estimate. Using exchange rates of six major currencies to illustrate the approach, we compare the Big Mac forecasts with those derived from a random walk and the CPI and find some support for our approach, especially at longer term horizons.

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Section: Introductionmentioning

confidence: 99%

A new approach to forecasting exchange rates

Clements¹,

Lan²

2010

Journal of International Money and Finance

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“…The purpose and approach of this study is also different from ours: While Cuthbert seeks to explore the similarity, or co-movement, among a small number of aggregated volume indices with the ultimate goal of exposing their strengths and weaknesses in measuring real income, we are more interested in both price and consumption structures of a large number of disaggregated items. Additionally, we allow the aggregation level to vary, and show that the main results do not change substantially with aggregation (see Section 5.2).16 This matrix has the same form as the "pay parity" matrix from the paper with the same title ofClements, Lan, and Seah (2012), in which case p refers to a vector of executive remuneration.…”

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confidence: 99%

Understanding International Price and Consumption Disparities

2021

SSRN Journal

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This study proposes a new measure of the tradability of 120+ commodities based on price dispersion. This approach is used to construct price indices of tradables and non-tradables for 150+ countries. The expenditure share of tradables is lower for richer countries, while the relative price of non-tradables, which plays an important role in the determination of real exchange rates, is higher. Secondly, a common-factor approach (based on principal components) is introduced to compress the large volume of information on prices and quantities consumed globally. We find that cross-commodity correlations are higher for prices than for consumption.In addition, income is responsible for 98% of the variation in the first principal component of consumption but explains only 24% of the first price component. This suggests consumption are driven primarily by domestic factors, while prices are determined by factors outside the country, along the lines of the Purchasing Power Parity theory.

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“…Correlation coefficients measured by convergence in 3). Results of correlation analysis in Table 1 do not support the viewpoint that the developed country is to be more stable in local prices and exchange rates, and this is applicable for all base currencies.…”

Section: Measures Of Affordability Overtimementioning

confidence: 77%

“…The ease and transparency provide the Big Mac Index a quick and rough estimate to forecast foreign exchange rate. (Clements et al, 2012). The price difference of Big Mac hamburger may be distorted by trade barriers on beef, sales taxes, local competition, and changes in the cost of nontrade inputs such as rents (Loveridge & Paredes, 2018).…”

Section: Introductionmentioning

confidence: 99%

The Big Mac Index Dynamics

Chen¹,

Li²

2020

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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.

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The Big Mac Index two decades on: an evaluation of burgernomics

Cited by 25 publications

References 29 publications

A new approach to forecasting exchange rates

A new approach to forecasting exchange rates

Understanding International Price and Consumption Disparities

The Big Mac Index Dynamics

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