Big Mac Theory Issues - Essay Example

It was suggested that the Big Mac index should be used for the Prediction of exchange movement in different countries termed with a Big Mac that the price of Big Mac should be kept the same in every country in exchange rates. Big Mac was specifically under consideration because it was the only chain present in almost every country and have an affordable price, that can be dealt with an average-income individual (Kotler & Armstrong, 2009).

McDonald’s best-selling product is Big Mac. While hanging out with friends, or for lunch or dinner, people order mouth-watering Big Macs with accessories. Big Mac Theory is a theory named to make this product, the most profiting product around the globe. The theory that stabilizes the Big Mac profit is the relationship between currencies, the United States Dollar (USD) with other foreign currencies at current exchange rates. Fed, an economist calls this exchange-rate theory a game of achieving with currency rates.  Big Mac theory tells us that the original exchange rate is nominal as adjusted for the ratio of different prices to local prices allowing economists to compare the purchasing power of different currencies (Kotler & Armstrong, 2009).

To make it clearer PPP Purchasing Power Parity of foreign currencies is measured by the use of the Big Mac Theory. The local currency is used for price comparison and will convert into USD. The country in which Big Mac is priced in terms of USD issuing supposedly is considered to have an overvalue in comparison to U.S. dollars. On to this if the estimated price in terms of USD is low then it is an undervalued currency.  Globally it is considered to be a consistent price around the globe. This theory is referred to as Purchasing Power Parity (Kennedy, 2006).

Over Toothache Purchasing Power Parity, many factors are there to put influence the price of Big Mac. Factors other than PPP are labor cost, rent, and other surcharges, which later are added while fixing the final price but that only affect the local consumers and have no relation with McDonald’s head institution. If the exchange rates are allowed to fluctuate, the currency value will establish and can be factorized efficiently in these variables allowing investors to employ capital inflow efficiently. In short, the Big Mac theory is about profits at exchange rates (Kotler & Armstrong, 2009).

Global financing operations are for those institutions that work or invest on an international level and follow set standard regulations, as opposed to institutions that work on a regional or national level. To maintain these operations, the IMF, the World Bank, government agencies, and ministries of finance design laws and rules through understanding and economic laws.

McDonald’s is an international food chain that runs its franchises all around the globe. It follows a law of one price which means that the selling price is fixed in one currency and is sold at the same rate in any country at the exchange rate (Kennedy, 2006).  Purchasing Power Parity (PPP) explains that purchasing power of Big Mac varies according to the price that comes out at the exchange rate. For example, if Big Mac is sold at $2.5 in the U.S., the rate of the Big Mac in the U.K. will be £2. It does not include tariff charges or carriers to keep cost-neutral (Kotler & Armstrong, 2009).

McDonald’s Big Mac is sold every day in different regions in different quantities. It very much depends upon the purchasing power of a particular region. Internal issues like inflation and low incomes can result in low sales that can lead to a severe loss to that particular franchisee and ultimately to McDonald’s chain. The Big Mac index was introduced in 1986 as a tool to keep a record of whether currencies are at the correct level. It is not a precise calculator but can help in setting up further strategies (McDaniel & Gates, 2007).

To avoid risk in gains and to neutralize loss, a fixed price is kept selling Big Mac all around the world. For example, if there is serious inflation in a particular region, the seller will find it impossible to sell Big Mac if exchange rates are not adjusted. This law of Purchase Power Parity is designed to manage risks rather than going into a total loss. Loss at one end will be managed by an extra gain in another region. If in case $ U.S. value increases or decreases, the price of the Big Mac will change ultimately across the globe (McDaniel & Gates, 2007).

Because of the increase in poverty and inequality, since the turn of the century, globalization in any aspect is now at stake but Big Mac is a product that is proudly sold in every corner of the world. Price is set as per Purchasing Power Parity that just covers a raw cost; a major part of the cost comes as per rent, salaries, tax, etc. which is much lower in developing countries. The price is well-kept and adjusted to avoid risks. Even if it faces crises in one region, it is easy to bear fluctuation in the generation of revenues from other outlets.  All strategies and policies are kept minimizing loss and maximizing profits. Big Mac is the desired product and has minimal chances to go into loss. Thus, McDonald’s without Big Mac is unimaginable.