The Adjusted Big Mac Methodology: A Clarification

Forthcoming, Journal of International Financial Management and Accounting

21 Pages Posted: 8 Sep 2015 Last revised: 12 Sep 2017

See all articles by Thomas J. O'Brien

Thomas J. O'Brien

University of Connecticut - Department of Finance

Santiago Ruiz de Vargas

NOERR AG WPG StBG - Advisory Services

Multiple version iconThere are 2 versions of this paper

Date Written: April 16, 2016

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 FX rates have been better forecasts of actual FX changes than those of the original “raw” Big Mac index.

Keywords: Adjusted Big Mac Index, Currency, Foreign Exchange, Valuation, Purchasing Power Parity, Penn Effect, Balassa-Samuelson Effect

JEL Classification: F31

Suggested Citation

O'Brien, Thomas J. and Ruiz de Vargas, Santiago, The Adjusted Big Mac Methodology: A Clarification (April 16, 2016). Forthcoming, Journal of International Financial Management and Accounting. Available at SSRN: https://ssrn.com/abstract=2656881 or http://dx.doi.org/10.2139/ssrn.2656881

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
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Storrs, CT 06269
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HOME PAGE: http://www.business.uconn.edu/staff.asp?id=57

Santiago Ruiz de Vargas

NOERR AG WPG StBG - Advisory Services ( email )

Brienner Str. 28
Munich, Bavaria 80333
Germany
+4989286280 (Phone)

HOME PAGE: http://www.noerr.com

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