The Adjusted Big Mac Methodology: A Clarification

16 Pages Posted: 3 Jan 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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

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.

Suggested Citation

O'Brien, Thomas J. and de Vargas, Santiago Ruiz, The Adjusted Big Mac Methodology: A Clarification (February 2017). Journal of International Financial Management & Accounting, Vol. 28, Issue 1, pp. 70-85, 2017. Available at SSRN: https://ssrn.com/abstract=2892821 or http://dx.doi.org/10.1111/jifm.12054

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
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Santiago Ruiz De Vargas

NOERR AG ( email )

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