# Introduction he BIGMAC Index was designed by The Economist in 1986 as a happy manual for whether monetary standards are at their "right" level. It depends on the hypothesis of acquiring power equality (PPP), the thought that over the long haul trade rates should move towards the rate that would even out the costs of an indistinguishable container of merchandise and enterprises (for this situation, a burger) in any two nations. The BicMac list has been distributed every year by The Economist since 1986 and is evaluated as a streamlined pointer of a nation's individual obtaining power. The same number of nations have various monetary forms, the institutionalized BIGMAC costs are determined by changing over the normal national BIGMAC costs with the most recent swapping scale to U.S. dollars. The Big Mac, as a top-selling McDonald's burger, is utilized for examination since it is accessible in pretty much every nation and fabricated in an institutionalized size, piece and quality. McDonald's is an overall working drive-through joint chain with central command in Oak Brook, Illinois. Its worldwide income added up to about 21.03 billion U.S. dollars in 2018. Most McDonald eateries are spread over the United States. The BIGMAC Index is determined by partitioning the cost of a BIGMAC in one nation by the cost of a BIGMAC in another nation in their separate nearby monetary forms to land at a conversion scale. This conversion scale is then contrasted with the official swapping scale between the two monetary forms to decide whether either money is underestimated or exaggerated by the PPP hypothesis. For instance, assume that a BIGMAC in the U.S. costs one U.S. dollar and one in the eurozone costs two euros. The BIGMAC Index valuation for EUR/USD would be 2.0, or two partitioned by one, which could then be contrasted with the EUR/USD swapping scale. In the event that the EUR/USD swapping scale was 1.5, financial specialists may anticipate that the euro is underestimated by 0.5 Euros per U.S. dollar. Burgernomics was never planned as an exact measure of cash misalignment, simply an instrument to make conversion scale hypothesis progressively edible. However, the BIGMAC list has gotten a worldwide standard, remembered for a few monetary course books and the subject of a decent number of scholarly investigations. Financial specialists can utilize information from the BIGMAC Index from various perspectives. For example, they can utilize the qualities to decide whether a money is exaggerated or underestimated comparative with others, at that point exchange dependent on that information the outside trade showcase. Correspondingly, financial specialists can quantify changes in values after some time to decide paces of expansion and contrast that with authentic records. Expansion itself is incredibly helpful to know with regards to esteeming money related instruments. For instance, security yields must factor in the foreseen paces of expansion to guarantee that they will stay alluring later on. Swelling rates likewise sway money valuations, which is significant for lawmakers while deciding if duties or other exchange hindrances are defended. At last, worldwide speculators should utilize the BIGMAC index as one of the numerous instruments available to them while breaking down universal markets. # II. # Review of Literature a) The history of purchasing power parity One of the main components of the main economic theories that can be used to state and calculate the relative value of currencies. Many theories state that purchasing power parity (PPP) can estimate in certain conditions the exact number of euros to buy US dollars and measure the exact number of goods that would cost a person to buy the same goods with these euros. The main aim of PPP is identifying the exchange rates of the BIGMAC index, the PPP equation helps one to guess what the exchange rate would have to be between two currencies in order for the each to be in accordance with the two currencies purchasing power (Ong, 2003). Using the PPP value for hypothetical conversations in the currency, the given amount of the currency will consequently have the exact same purchasing power, if this purchasing power is directly used for the purchase of a commodity basket of goods, therefore observed exchange rate deviations from PPP are calculated by the real exchange rate deviations (Josic & Wittine, 2018).PPP exchange rates tend to reduce unfair international comparisons with markets exchange rates. For instance, suppose that two countries produce the same physical amount of goods as each other in each of two different years". Because market exchange rate varies significantly when the GDP is put in consideration. By using market exchange rates, one currency is being calculated and in its own value and it will be converted to the other country's currency (Pakko & Pollard, 2003).There's also an economic theory which the PPP is founded on called the law of one price (LoOP) which indicates that a basket with the same products should sell for the exact same price in two different markets giving that the cost, taxes, and tariffs factors remain off the equation (Jo?i ?, Wittine & Bari?i?, 2018) . In one year, one country could be deduced to have higher real GDP than the other, but lower in the other rate; these two interferences would not represent the reality of their relative production levels. But if the GDP of one country is converted into the currency of the other country using PPP exchange rate rather than the market's exchange rates observed. Another perception states that the value of exchange rates difference at home and abroad is equal to the exchange rate depreciation percentage of appreciation deviations from parity indicate differences in countries own purchasing power (Pakko & Pollard, 2003). The actual exchange rate is the same as the average exchange rate, modified by the price's differences. If PPP is being considered properly, the actual exchange rate will always equal "1". # b) The history of BIGMAC index The BIGMAC index was made by The Economist in the year 1986 as a guide to discover if the currencies are in their actual levels or not (Reuters, 1843). According to the economist magazine, BMI measures the purchasing power parity (PPP) between countries and nations. As quoted by (Reuters, 1843)," the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries." The BIGMAC index was made by The Economist in the year 1986 as a guide to discover if the currencies are in their actual levels or not (Reuters, 1843). According to the economist magazine, BMI measures the purchasing power parity (PPP) between countries and nations. As quoted by (Reuters, 1843), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries." # i. The Concept of BMI The Burgernomics" main aim was to invent a tool to adjust the exchange-rate theory and make it more absorbable (D.H. & R.L.W., 2018). "lighthearted, tongue-in-cheek, half-hearted" are some symbols associated with the introduction of The Economist about The BIGMAC Index since the development in 1986 (M. D college,2014). The concept of BMI is based on some theories. The BIGMAC Index was created to measure the disparities in consumer purchasing power between nations, the burger replaces the goods basket that analysts have been historically used to calculate the consumer's price disparities. Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible," as stated by economists. In fact, the BIGMAC index is widely used for the comparison of prices. The currency value stands for the changes of the expected price of the red line for each country and its actual price gives a supersized measure of under-and over-valuation of currency, according to (D.H. & R.L.W., 2018). For instance, if the price of a BIGMAC is 3$ and 60 pesos a PPP exchange rate of US 1$ to 20 pesos is indicated. The US$ is counted against the pesos by 33% as mentioned by (M.D college, 2014). As stated in the M.D college article (2014), in those trading of stock by computer, the process done by Mexican fast food shop owners of which they exchange the pesos with dollars by buying them, leads to the decrease of the value pesos and the increase of the value of dollar. This action of manipulating a BIGMAC alone apparently wouldn't be enough for the country's exchange level whether to get it up or down, but if all goods were taken in consideration -according to the theory-, economists take into account the index to be a reasonably correct real-world indicator of native economic buying power, since the rating of a giant macintosh, like most commodity, should take into consideration native prices of raw materials, labor, taxes, and business premises (Pakko & Pollard, 2003). The burgernomics is a terminology that stands for the economic value of a burger. Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Another concept the BIGMAC index is based on, is that it might assist to grasp the possible long direction that a currency may take, If the BIGMAC index shows that a selected currency is undervalued, it is expected that over the semi permanent exchange rates can change so the PPP is accordingly equal, this occurs because of the integrated existence of global trade and purchasing power parity disparities continue to level out over time (Pakko & Pollard, 2003). # ii. The relationship between BIGMAC and economics BIGMAC index is based on the theory of PPP, the relation of the BIGMAC and economics was introduced by the economist journal in 1986 as a guide that can be used as a calculator to measure the exchange rates; furthermore, the cost of the same burger in any two countries. PPP which stands for the purchasing power parity, it is defined as the amount of economic theories and an approach used to figure the relation between values and different currencies. Karl Gustav Cassel (1918) was at the time the creator of the concept behind the theory of the PPP and the most respected economist in this sector (Josic & b, 2018). PPP demanded that price levels must be identical in two countries when exchanged into a common currency to guarantee that the real exchange rate is equivalent to unity (Ong, 2003). According to Josic & Wittine (2018) the absolute PPP valuation is a divergence from the balance of purchasing power. The Local currency is overvalued against the USD if deviations are positive, otherwise local currency is undervalued, this absolute valuation is calculated by using some specific equations for the BIGMAC index (Josic & Wittine, 2018).Therefore, it could be said that the exchange rate theory of the PPP looks at the relationship between the foreign exchange rate of a nation and its price level, as well as the relationship between the changes in those variables (Ong, 2003).This summarize the relation of how a burger can be related to economics and help to measure the difference of a currency with another. # III. # The Two Methods of BMI According to the economist magazine there two ways to calculate BIGMAC index, the first is the "raw" BIGMAC index which compare the absolute value of PPP to the FX value, and the second is the "adjusted" BIGMAC index which add a cross-sectional linear regression to the equation to modify the values of PPP variations and compare it to the GDP per person. The new modified BMI focus on the false idea that the expected average prices of burgers to be cheaper in poor nations than in rich ones as the labor costs less (D.H. & R.L.W., 2018). The ideology of this new method is using a line to measure the BIGMAC prices and GDP per person and compare the data with the income of people. This gives a closer supersized measure to the misevaluation of a certain currency. # a) Currency misevaluation As the currency misevaluation is identified as the difference between the real rate of exchange and the intrinsic currency exchange rate a certain currency may be overestimated or underestimated to a different one. The FX value is based on an economic ideology like the PPP. It also can differ from the currency reference when estimating the bilateral evaluation of the currencies (O'Brien & Vargas, 2018). There are many ways to calculate currency misevaluation but let's just focus on the BIGMAC index. putting the new method of measuring the misevaluation of currencies for example (figure 1), shows the dollar valuation in Egypt using both methods, the data differs as the dollar valuation by using the raw method value in Jan 2018 is -63.40% on the other hand by using the adjusted method the value at the date is -34.70% . # b) Calculating BMI The way to calculate the BIGMAC index is to divide the price of the burger in the currency of the chosen country by its price in the US, and compare the result with the official exchange rate to reach an understanding if the currency is under or overvalued. For example, the formula should look like: ?????? = ?? ?? ?? * ?? ?? ?? is the price of burger in local currency of the chosen country, while ?? * ?? is the price of the burger in US dollars. The BIGMAC index is considered useful for currency traders trying to evaluate the long-term expectation and exchange rate assessment of a currency. If the BIGMAC index rate varies from the actual exchange rate, it can be used as a predictor of a potential foreign currency price adjustment. PPP and the BIGMAC index, in fact, can help traders create a connection between products and currency trading, and can act as a guide to where the market may go. There are a variety of other indices that measure demand, such as the US consumer price index (CPI) and the British consumer price growth index. (Herath, 2017). The BMI, however, is helpful for comparing prices of nations with different economic welfare. With more than 34,480 locations in 119 countries, McDonald's is the world's largest restaurant chain, so it's easy to understand how a burger can be a global benchmark. Big Macs are also considered to be the same globally, because they are technically similar in volume, value and ingredients. # d) Limitations of BMI Although BMI can be helpful, however it may be misleading about the economic condition of a certain country. Many people may seem to think that the price of BIGMAC is very cheap comparing to other countries, well it is. However, this is not how reality works. Due to transportation costs, the prices of similar items can vary by location. The pricing of the same good priced in various countries around the world will be different. # ii. Taxes and tariffs Governments around the world impose different taxes, tariffs and restrictions on manufactured and exported products. The price levels will vary from country to country due to these added taxes (Alessandria & Kaboski, 2008). # iii. Non-tradable goods In an economy, there are certain goods and services that cannot be sold across borders. for instance, the rental business space. The owners must rent a property in that particular country to run a McDonald's restaurant. If the neighborhood is highly populated, the rent on the land can be significantly high. In that particular market, expensive land leases will be passed on to the BIGMA Crates offered. There are more non-traded resources that are not into consideration, such as water, energy, land-rent, etc., can have a major impact on countries ' relative price scales. # iv. Income levels According to world data website, the average monthly income in Egypt is $233, however, in Israel is $3404 and in the US is $5238. A Survey were conducted by UBS Prices and Earnings Survey 2018 (table 1) shows the time needed to a person be able to buy a big mac; a person in Egypt must work a least 101.2 minutes to be able to buy a big mac. On the other hand, a person in the US (Los Angeles) 13.6 minutes. Adding GDP per capita to the equation which also based on the PPP theory, but it adds the buyer's sum gross value of prices and any good taxes minus the substitutes not added in the value of the good. (figure 2) shows that how the GDP per capita is more reliable to understand the economy in each country. The BMI cannot be a determiner on realty because of the other factors that effects the price of the burger. # IV. # Conclusions To summarize, BMI was originally developed by the Economist magazine in 1986.BMI is based on the application of PPP as the formula allows one to calculate what is the exchange rate of two currencies have to be in order for each to match the purchasing power of a basket of goods. Using the PPP value of theoretical currency interactions, the specified quantity of the goods will therefore have exactly the same purchasing power, if this purchasing power is used explicitly for the purchase of a basket of goods, the real exchange rate deviations will be measured. The theory suggests that the currency exchange of two countries, in the longer term, will rise toward the conversion point to allow the same rates of equivalent goods and services. If the prices of a basket of identical products are constantly divided around different countries, it may give the country that sells the goods for the lowest price a chance to purchase it. PPP exchange rates tend to reduce unfair comparisons to exchange rates on the international market. There's also a fundamental theory such as the LOOP, which indicates that a basket of the same products should be sold at exactly the same price in two different markets, so that costs, taxes and tariffs remain outside the equation. as they the raw BMI is calculated by dividing the local price of BIGMA Cover the US price of the same good; to determine the if the currency is over or undervalued to the US dollar. Over the years the adjusted BMI came to light; that used a cross-sectional linear regression to give more realistic data and information about the countries economic condition. However, the BMI cannot be used as the only indicator to understand and forecast the economic conditions of a certain country as it has many limitations such as production cost, wages of employees, taxes, and non-tradable goods. The BMI can be a used as a really good indicator to measure the currency misevaluation, but it's not enough for traders or economists to extract any empirical data that will help to forecast the future of a certain currency ![](image-2.png "") ![](image-3.png "") 1DateCountry Local price US price BMIExchange rateRaw index1/1/2018Egypt34.215.286.479117.7Undervalued by 63.4%1/1/2018 Sweden49.105.289.308.02Overvalued by 16%1/1/2018Israel16.505.283.133.44Undervalued by 9.1%Sources: McDonald's; Thomson Reuters, IMF; The economistc) Should BMI be used as an indicator? Does BIGMAC Index Consider as a Substitute for Inflation Rate * Why Are Goods So Cheap in Some Countries? GAlessandria JKaboski Business Review 2008 * The BIGMAC index two decades on: an evaluation of burgernomics KWClements YLan SPSeah 10.1002/ijfe.432 2010. October 12 * The BIGMAC index DH RL W January 2018 17 * Burgernomics and Purchasing Power Parity AHerath Economic Review 2015 * Investigating the Determinants of Bigmac Index: A Panel Data Analysis HJo?i? ZWittine ABari?i? 2018 * BIGMAC index Project October 2014 * Clarifying the Adjusted BIGMAC index TJObrien SR DVargas 10.2139/ssrn.2656881 SSRN Electronic Journal 2015 * The BIGMAC index: applications of purchasing power parity LLOng 2003 Palgrave Macmillan Houndmills