The Big Mac index, first jokingly described in The Economist, and then used seriously ever since, measures the relative price of McDonald’s Big Mac burgers around the world. The idea behind the Big Mac index is that the burger is a commodity comparable across various regions appealing equally to different people and, therefore, the burger price adequately reflects currency valuations. The price of burgers in each individual economy, however, is determined in turn by supply and demand, the same factors driving McDonald’s profitability in each individual economy. And, as the Quant Profile section of this report shows, the supply and demand for McDonald’s goods in the U.S. may be predicted by several macroeconomic factors.

Specifically, factor analysis indicates that higher layoffs increase the demand for burgers in the U.S. U.S. burger sales appear to dwindle along with increases in the following variables, indicating expansion in the economy:

Wholesale Trade; Inventories - M/M change
Treasury International Capital; Foreign Demand for Long-Term U.S. Securities
Retail Sales; Retail Sales - M/M change
Retail Sales; Retail Sales less autos - M/M change
Philadelphia Fed Survey; General Business Conditions Index - Level
Leading Indicators; Leading Indicators - M/M change
ISM Mfg Index; ISM Mfg Index - Level
Industrial Production; Production - M/M change
Housing Market Index; Housing Market Index
GDP; Real GDP - Q/Q change - SAAR
Factory Orders; Factory Orders - M/M change
EIA Petroleum Status Report; Crude oil inventories (weekly change)
Business Inventories; Inventories - M/M change
ADP Employment Report; ADP employment

The above macroeconomic announcements may be used to predict the Big Mac index ahead of time, improving forecasts.

This entry was posted on Friday, December 23rd, 2011 at 11:22 am and is filed under Quant Speak. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.