Reference no: EM133275400
What are some of the limitations of the Big Mac Index? (mark all that apply)
It's based on the price of just one good (Big Mac) and not on the price of a basket of goods
The Big Mac index approach to PPP has several limitations. For instance, Big Mac prices may change due to other factors than food ingredient costs such as labor costs, rent, taxation systems, availablility of domestic production, possibility of paying royalties to McDonad's global, among others.
The Big Mac index is not representative anymore. People are increasingly self conscious about the impact of fast food diets in their health and eating at a fast food restaurant carries a stigma that can influence local fast food prices.
The PPP (Purchasing Power Parity) tends to hold when we compare relative price changes in a basket of goods that are representative of local customs. For example, in Germany the price of sausage may be relevant whereas in the U.S. the hamburguer is more representative of a tipical American diet.
The PPP does not hold because major developed countries cannot agree on how to measure inflation.