The Adjusted Big Mac Methodology: A Clarification

Thomas J. O’Brien · Santiago Ruiz de Vargas

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

Abstract The Economist's adjusted Big Mac index takes GDP into account in currency valuation, but the methodology is not explained. We show that the key to understanding the methodology is to distinguish between a currency's bilateral valuation (versus a specific currency) and the currency's overall valuation (versus a “basket” of a large number of currencies). Also, the adjusted Big Mac estimates of intrinsic foreign exchange (FX) rates have been better forecasts of actual FX changes than those of the original “raw” Big Mac index.

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References

1991The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988 1964The Purchasing-Power Parity Doctrine: A Reappraisal 1996The Purchasing Power Parity Puzzle 1964Theoretical Notes on Trade Problems 2002Dynamic Panel Estimation and Homogenity Testing Under Cross Section Dependence 2004The Purchasing Power Parity Debate 1987Real-Financial Linkages Among Open Economies 1983Toward an explanation of national price levels

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2016Simplifying The Big Mac Index

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