Here is something that I use with my Year 12 & 13 Economics students when looking at the comparison between nominal GDP and PPP – NCEA Level 3 Growth external and CIE A2 Unit 4. I have found the worksheet that follows useful for students to workout the price of a Big Mac in US dollars in each country, the Big Mac exchange rate and compare it with the actual exchange. The table below gives the Nominal GDP in various countries expressed in US dollars. If you convert the value of GDP in local currency into one common currency (US$) it gives you a false idea of many countries’ economic status. The cost of different goods and services can vary widely – countries like China and India have much lower costs for most consumer items compared to more developed countries like the US and Germany. Therefore to make a more accurate comparison economists tend to use the purchasing power parity (PPP). This is a simple calculation where a base currency is chosen (usually US$) and a basket of goods and services is chosen. They are then compared to the value of the same items in another country using traditional exchange rates. However it is not as simple as that as countries use a wide variety of goods and services that are not the same or not as popular in certain countries.
Countries by Nominal GDP US$ – October 2019 (ranking is on Nominal GDP)
*New Zealand’s GDP in NZ$ is approximately – NZ$ 314 billion (March 2020)
The Economist came up with the Big Mac index in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. Here is something that I put together using the the Big Mac index from The Economist website. Students have to complete the table below.
The Big Mac Index – July 2020
- Complete the table above. In which country was their actual exchange rate on July 2020 closest to their Big Mac exchange rate?
- Which country’s currency is suggested by your calculations above as being
a) the most undervalued against the dollar, and the most overvalued against the dollar?
- What factors could have an influence on exchange rate values on a given date as shown in the table above.
- In which country was their actual exchange rate on July 2020 closest to their Big Mac exchange rate?
You can check your answers and other countries Big Mac Index by going to The Economist’s website – click below: