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Big Mac
Big Mac Index
An entertaining example of one measure of PPP is the Big Mac index popularized
by The Economist, which looks at the prices of a Big Mac burger in McDonald's
restaurants in different countries. If a Big Mac costs US$4 in the U.S. and GBP£3
in Britain, the PPP exchange rate would be £3 for $4. The Big Mac Index is
presumably useful because it is based on a well-known good whose final price,
easily tracked in many countries, includes input costs from a wide range of
sectors in the local economy, such as agricultural commodities (beef, bread,
lettuce, tomatoes), labor (blue and white collar), advertising, rent and real
estate costs, transportation, etc.
Examples
West and Central African Franc
In 2003, the U.S. Dollar bought on average about 550 CFA franc. Because of a
difference in purchasing power within some of the regions using the CFA franc,
their purchasing power parity exchange rate differed greatly (lower implies a
stronger currency): Cameroon 240, Central African Republic 166, Chad 172,
Republic of the Congo 677, Equatorial Guinea 114, Gabon 413, Benin 273, Burkina
Faso 167.
GDP of China
The CIA misuses the purchase power parity (PPP) method in its calculations of
Gross National Product [2]. By this measure the People's Republic of China has
the second largest economy in the world, at $8.182 trillion (2005 est.) (CIA
methodology for PPP). However, the empirical foundation for all PPP estimates
for China is weak, since no comprehensive survey of Chinese prices has ever been
carried out by the International Comparison Project. Moreover, PPP measures the
urban consumer basket of goods, which is a very small part of the economy of
China. Prices behind existing PPP estimates are few, out of date and may be
unrepresentative of today's price structure.
However, the World Bank's World Development Indicators 2005 estimates that one
United States dollar is equivalent to approximately 1.8 Chinese yuan by
purchasing power parity in 2003. [3]
Need for PPP adjustments to GDP
Using market exchange rates to compare countries' standard of living or per
capita Gross Domestic Product can give a very misleading picture. The exchange
rate only reflects traded goods in contrast to non-traded ones. Also, currencies
are traded for purposes other than trade in goods and services, e.g., to buy
capital assets whose prices vary more than those of physical goods. Also,
different interest rates, speculation, hedging or interventions by central banks
can influence the foreign-exchange market.
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