To follow up on my blog # 12 regarding the Big Mac™ Index, it is time to look deeper into the theory of Purchasing Power Parity (PPP), since the PPP has been using US Dollar as the reference to determine the relative values of currencies, especially during the Global Economic Recession which has affected the United States the most. The Global Economic Recession started in 2007 and stabilized somehow in late 2008 to mid 2009.
To example to be used here is the price of Big Mac™ from  in seven selected different Counties/Area from the year 2007 to 2011, as below:
Table 1 : Big Mac™ Price  from 2007 to 2011
The Country/Area Selection is based on the highest and lowest price and the most stable countries during the recession, according to the IMF report 
The Purchasing Power Parity Theory, which is one of the foundations of international economics, is stating that the price levels in any two countries should be identical after converting prices into a common currency . So far all indexes are calculated by using the US Dollar as reference and if we take the prices from Table 1 and plot them in the below Graph, it is showing a non-linear lines for all Countries/Area and certain instability of increments over the period from 2007 – 2011.
Figure 1 : The Big Mac Price from 2007 to 2011
Taking the average Gold Price USD/Oz. from  from the year 2007 – 2011, with an almost linear increase as indicated by the linear trend line with R2 coefficient of 0.9828 as shown below, we can calculate the Index based on the Gold Price.
Figure 2 : The Gold Price  from 2007 to 2011 with trend-line
The selection criteria will be:
Using the data period from the year 2007 to 2011, using average values for all selected data.
Calculate the Index based on the Gold Price for all selected Countries/Area.
Compare the Indexes between the US Dollar based and the Gold based
Analysis and Comparison of Alternatives
The calculation of the Big Mac™ Price from US Dollar to Gold is given in the below Table:
Table 2 : The Big Mac™ Price in Gold [Oz. x 1000]
The R2 Coefficient for the Chinese Yuan [CNY] is the worse, since the graph is almost flat compared to others, whereas the US Dollar is on zero line as reference line for Over or Undervalue of the currencies.
Selection of the preferred alternatives
Plotting the Big Mac™ Index from  from year 2007 to 2011, as compiled in the below Table and shown in Figure 3, we can see that all Indexes showing an increasing trend from 2010, except for Hong Kong, which is showing a flat trend. This indicator was used as one of the argument that the global recession is already recovered in 2010.
Table 3 : The Big Mac™ Index  from Year 2007 to 2011
Figure 3 : The Big Mac™ Index  from Year 2007 to 2011
When we take the figures in Table 2., and calculate the Purchasing Power Parity Index based on Gold Price, we can see the result in the below Table and plotted in Figure 4:
Table 4 : Calculated PPP Index using Gold as Base from Year 2007 to 2011
Figure 4 : Calculated PPP Index using Gold as Base from Year 2007 to 2011
Comparing the trends in Figure 3 and Figure 4, we can see that
In Figure 3 between Year 2008 and 2010, the recession only affecting overvalued Country/Area, in this case Euro Are and Switzerland, by having a declining Indexes, whereas all Undervalued Countries still having I slight increased Indexes.
In Figure 4, all Countries/Area having a declining trend and all are Undervalued, except for Switzerland in 2007 with still positive Index Value. Between 2008 -2010, the declining Gradient is so showing a ‘nosedive’ trend especially for Switzerland, Euro Area and USA and after wards they are showing a slight slope only.
Performance Monitoring & Post Evaluation of Results
From the above calculation and above analysis, we can say that:
The fact that the Global Economic Recession has an impact to all selected Countries here, but the impact of the recession mostly hit the US Dollar and as we can see from the declining trends also the Euro Area and Switzerland CHF.
The Gold Price at the other hand is showing constant increase over the period of time and accumulatively over the period of 5 years, the increase is 65.5%
The Big Mac™ price converted into Gold [Oz.x1000] is showing a reduced price over the time
Taking the Big Mac Index and convert the values to Gold Price is saying that the US Dollar has a different behavior and cannot be seen as the stable reference for the Index.
Comparing the PPP of Big Mac™ Index with the PPP of Gold [Oz.x1000] is seen that a contrary trends and behavior between the two Indexes, especially for the classification of under- and Overvalued.
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