Burgernomics: The Big Mac Index

image via Say It Ain't So, Joe

Yes, there’s endless news of the economy’s continuing slide into oblivion. But there’s another reason to be pessimistic: have you seen the price of a Big Mac?

A Big Mac is a Big Mac wherever you go. Same sesame seed bun, same special sauce, same double beef patties. It’s a truly global consumer product comprised of the same tradeable goods and non-tradeable services worldwide. It should, in theory, cost roughly the same anywhere in the world.  Swap your dollars for the local currency, and the four dollars that got you a Big Mac in Des Moines should still buy you a burger in Kuala Lumpur, give or take a few Malaysian ringgits.

In fact we don’t have burger parity. Buy a Big Mac with Ukrainian hryvnias and you’ll pay less than two dollars; spend some Norwegian kroner and it will set you back more than eight dollars.

The Big Mac Index, compiled annually by The Economist, is designed to test the theory of burger-buying parity. It demonstrates the purchasing power of consumers around the globe by converting the world’s currencies to a hamburger standard. The fair-value benchmark– the point where there is purchasing parity between the nations– is the exchange rate that has every consumer world-wide paying the same price for a Big Mac. If you’re paying more than the benchmark price for a Big Mac, it tells you that you live in a country with an overvalued currency.

The burger barometer .
The ‘raw’ index is adjusted for GDP per person as a more meaningful guide to currency under- and overvaluation. The closer the adjusted index gets to zero, the closer a country comes to burger parity. The larger the difference, the more expensive it is, in real buying power, to purchase a Big Mac; a smaller number tells you the burger is a  bargain.

A look at the chart, below, and it’s clear that you pay a premium for special sauce in Latin America; the Brazilian real is the world’s most overvalued currency, with the Colombian and Argentinian pesos not far behind. The British pound is running almost even with the dollar, while the overvaluation of the euro zone seems to hint at the currency struggles of Greece, Italy, Portugal and Spain. And for all our griping about the devalued Chinese yuan, when it comes to burgers, China’s currency is surprisingly close to its fair value against the dollar.

The Big Mac Index is undeniably simplistic. But it does make exchange rate theory a bit more digestible.


 

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