If you could create your own ‘Big Mac’ Index, what would you create and why?
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If you could create your own ‘Big Mac’ Index, what would you create and why? Tip: You do not need to actually create an index. This is just a discussion of what kind of index one could create in order to check whether parity conditions exist between countries. So think about a product that is the same everywhere, across countries and how you could look at the price of these products and compare then in terms of exchange rates to see if parity conditions hold. For example: soccer balls, or coke? Find other indices that have been created like this and share the links. For example there was a café latte and coke index created. They looked at the price of these items in different countries and compared the prices using the exchange rate to see if there were any disparities. KFC has operations in almost 20 African countries, which is the highest of any international fast-food chain. If I could create an index, I will probably look at KFC, to check the overvaluation or undervaluation of various currencies. History of KFC KFC is by far the largest fast-food chain in Africa, with more than 1,250 franchised outlets across 23 countries. Senegal and Sudan were added to this list during 2019. The first KFC on the continent opened its doors in Johannesburg in 1971, and there are now more KFC restaurants in South Africa (914) than in the UK (853). Egypt followed two years later, with that country now hosting 154 KFC outlets across 29 cities. the KFC Index would be a tool for measuring purchasing power parity and its limitations include factors such as inflation, dietary preferences, socio-economic classifications, levels of competition and local costs (e.g. advertising, production and taxes). Currency volatility – due to the nature of developing economies (in this case all countries in Africa), there is more likely to be high volatility in currencies, therefore undertaking this analysis over a one to three month basis could produce large changes and different conclusions. Black market – as there is a thriving market for US Dollars in some countries, it may produce conflicting results compared to the official exchange rate. Angola and Nigeria are examples of these types of markets. The report produced by Sagaci Research takes into account black market exchange rates. https://en.wikipedia.org/wiki/KFC_Index If a country’s currency is overvalued, this implies that it is cheaper to buy KFC chicken in the US than domestically. In this context, it is unsurprising that most African currencies are undervalued vis-à-vis the greenback. In a few cases, most notably South Africa and Egypt, this figure rises above 50%. Only two currencies, the West African CFA franc (soon to be re-named the “eco”) in Côte d’Ivoire and Senegal and the Central African CFA Franc in Gabon were found to be overvalued vis-à-vis the US dollar. It should be noted that there are a host of factors that determine the pricing of KFC chicken in different markets beyond FX rates. These include the purchasing power of local consumers, price elasticity of demand (the responsiveness of demand to changes in price), taxation, and input costs – most notably the cost of chicken, which is sourced locally. As a result, the KFC Index’s estimates of the overvaluation or undervaluation of various currencies are strictly notional. References https://en.wikipedia.org/wiki/KFC_Index https://www.howwemadeitinafrica.com/kfc-index-which-african-currencies-are-overvalued-or-undervalued/64100/ Download 15.47 Kb. Share with your friends:
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