March 9th, 2021
A look at the Big Mac Index and what $50 worth of Big Mac’s look like in different countries.
By Anmol Kumar
The Big Mac index is an informal way of measuring Purchasing Power Parity (PPP). Pam Woodall introduced it in September 1986. The Economist has been publishing it annually since then. The index has also given rise to the word burgernomics.
It follows that the rate between 2 currencies should naturally adjust so that a basket of goods and services costs the same in both currencies. The basket in question here is a single Big Mac burger as sold by McDonald.
The reason for choosing the Big Mac is because the average basket of goods in America is different from the average basket in China.
The Big Mac is made from the same ingredients worldwide apart from a few exceptions. By comparing the cost of a Big Mac in different countries we can see whether a currency is over or undervalued compared to another currency.
The Big Mac was chosen because McDonald’s is present in 120 countries and the Big Mac is one of its flagship products. Thus, the Big Mac enables a comparison between many countries’ currencies. Since a Big Mac can be purchased almost everywhere across the globe, it’s a great item to use as a standard measure of value across several countries
The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country by the price in another country (in their respective currencies).
This value is then compared with the actual exchange rate. If it is higher, then the first currency is overvalued (according to PPP theory) compared to the second. And conversely, if it is lower, then the first currency is undervalued.
The cheapest country to buy a big mac from, as of July 2022, is Venezuela ($1.76) followed by Romania($2.28). Whereas, the most expensive country is Switzerland($6.71) followed by Norway($6.26).
What are the Limitations?
While the Big Mac index is widely cited by economists as a reasonable real-world measure of purchasing power parity, the burger methodology has some limitations as well.
Because of the presence of the McDonald’s franchise, the Big Mac Index is geographically limited. In Africa, for example, McDonald’s is only present in Morocco, Egypt, and South Africa (there has been a similar index created solely for Africa called the “KFC Index”: as the name implies, this index compiles its data using KFC’s Original 15 pc. bucket rather than a Big Mac).
Eating at international fast-food chain restaurants such as McDonald’s is relatively expensive in many countries when compared to eating at a local restaurant, and demand for Big Macs is not as high in countries such as India as it is in the United States. Local taxes, levels of competition, and import duties on selected items may not represent the country’s economy as a whole.
Why non-tradable goods should be globally equal
Furthermore, there is no theoretical reason why non-tradable goods and services, such as property costs, should be equal across countries: this is the theoretical reason why PPPs differ from market exchange rates over time. The relative cost of high-margin products, such as essential pharmaceuticals or cellular phone service, may compare local capacity and willingness to pay as much as relative currency values.
Variation in commercial strategies
Nonetheless, McDonald’s employs a variety of commercial strategies, which can result in significant product differences. Overall, the price of a Big Mac will be a reflection of its local production and delivery costs, the cost of advertising (which can be significant in some areas), and, most importantly, what the local market will bear – which will vary greatly from country to country and is not entirely determined by relative currency values.
Variation in margins
In some markets, a high-volume, low-margin approach maximises profit, whereas, in others, a higher margin generates more profit. As a result, relative prices reflect more than just currency values.
A hamburger, for example, costs €1 in France and €1.50 in Belgium, but McDonald’s restaurants in both countries are roughly the same price. Prices for Big Macs can also vary significantly across the country. A Big Mac sold in New York City, for example, will be more expensive than one sold in a rural McDonald’s.
Another example is that, despite Moscow being the most expensive city in the world, Russia has one of the cheapest Big Macs at the time. In Russia, standard food ingredients are inexpensive, whereas restaurants suitable for business dinners with English-speaking staff are costly.
What are the Comparison Issues?
The nutritional value, weight, and even nominal size differences of the Big Mac (and virtually all sandwiches) vary by country.
Not all Big Mac burgers sold by the company are made entirely of beef. Beef burgers are not available at any McDonald’s locations in India, which is primarily a Hindu country. The Chicken Maharaja Mac is used in place of the Big Mac.
The exclusively beef “Big Mac” varies greatly: the Australian version has 22% fewer calories than the Canadian version and is 8% lighter than the version sold in Mexico.
On November 1, 2009, all three Icelandic McDonald’s locations closed, owing primarily to the high cost of importing most of the chain’s meat and vegetables from the Eurozone following McDonald’s demands and standards.
A Big Mac in Iceland at the time cost 650 kronor ($5.29), and the 20% price increase required to stay in business would have raised that cost to 780 kronor ($6.36). Iceland produces fish and lamb, but beef is frequently imported (but also exported).
What are the Variants?
Economist occasionally publishes variations on the theme.
1. Extension of Big Mac Index
A Swiss bank has expanded the Big Mac index concept to include the amount of time it takes an average local worker in a given country to earn enough money to buy a Big Mac. So, This intriguing illustration depicts how long a person would have to work to earn enough money to buy a Big Mac from a McDonald’s restaurant in his or her home country using local currency.
A Big Mac would take about 10-20 minutes of work for people earning the average net wage in the US or UK, but someone working in Mexico or Jakarta would have to work for more than two hours to afford that big hamburger.
Working time required to buy one Big Mac
2. Big Mac Pay Gap Index
Trusaic, a provider of equal pay compliance software, unveiled The Big Mac Pay Gap Index in 2022, which shows how much more a Big Mac would cost you after adjusting the menu price of a Big Mac to reflect any pay gap you may face.
The pay gap can appear to be an abstract concept, making it difficult to understand its impact on how much you earn and how far it gets you in terms of real-world purchases. The Big Mac Pay Gap Index illustrates how the pay gap affects your daily purchases more concretely.
So, if you have a pay gap, which means you earn less than others due to factors like gender, race/ethnicity, or both, the real cost of a Big Mac for you, once adjusted for your pay gap, is proportionately higher than the menu price.
Men, for example, earn 18% more than women on average, so there is no gender pay gap – and thus the real cost of a Big Mac for them is the same as the average U.S. menu price: $6.05.
The real cost of a Big Mac for women, on the other hand, is $7.38, due to the gender pay gap.
3. Starbucks Index
In 2019, Finder.com, a global personal finance comparison website, released a more comprehensive Starbucks Index, which examined coffee prices for a tall latte in 76 countries and autonomous regions around the world. The report included a Latte Line, which calculated the relationship between coffee prices and a country’s GDP.
The Starbucks index’s purpose is to display the purchasing power of each national currency represented, as reflected in the cost of a latte in that country in US dollars. A latte that costs significantly less in one country, for example, indicates an undervalued currency.
Based on the price of a tall latte, the Starbucks index predicts what currency exchange rates should be.
It accomplishes this by comparing prices in various countries in US dollars. According to the theory, once the exchange rate is applied, a tall latte in one country should cost the same in another.
In other words, when lattes are the same price in both countries, the two currencies are equal. A currency is considered overvalued if the price of a latte exceeds the price paid by a US consumer in US dollars, and undervalued if the price is less. Assume a tall latte in the United States costs $3.50, $4.00 in China, and $1.50 in Thailand.
According to the index, the Chinese renminbi is overvalued in relation to the US dollar, while the Thai baht is undervalued.
4. The Chai Latte
Versus created a version called The Chai Latte Global Index in 2017, comparing Starbucks Chai Latte prices around the world by first converting local prices into USD.
The Chai Latte Global Index attempts to demonstrate the purchasing power of various countries’ currencies in a fun and easy way, based on Starbucks’ global pricing strategy.
It is also based on the purchasing power parity (PPP) theory, which states that exchange rates should change in the future so that the purchasing power of two different currencies, and thus the prices of the same goods and services, are equalised by resolving differences such as cost of living and inflation rates.
Since gaining popularity outside of its native India, chai latte has conquered nearly every corner of the globe. This delicious black tea, infused with warming exotic spices and combined with steamed milk, is not only a delightful hot drink, but it can also demonstrate global economic disparities.
Although the ingredients are mostly consistent, the price of a Starbucks Chai Latte in New York should be the same as the price of a Starbucks Chai Latte in Berlin, Istanbul, and everywhere else.
A Starbucks Chai Latte, for example, costs 9300 Colombian Pesos, or about $3.25 at the current exchange rate. In Sweden, however, it costs 5,40 Euros, which translates to around $5,76, implying that a Colombian would pay much more in Sweden than in Colombia or even less in India ($2,94).
5. Gold-Mac Index
Gold-Mac-Index: The purchasing power of one gram of gold (Gold.de: calculation of the corresponding year’s gold price average), how many burgers one can get for one gram of gold.
Since its inception in April 2002, the Gold-Mac-Index has served as a purchasing power comparison of gold and euro once a year for a specific month. While the index’s value oscillated around one in the early years, it has shifted almost linearly in favour of the purchasing power of gold since 2009. The most recent index calculation, from February 2022, shows a value of 4.71, which is higher than any previous value.
The Gold-Mac-Index creators, the editors of the German information and comparison portal “Gold.de,” have not only compared the purchasing power of gold vs. euro since 2002, but they have also calculated, based on the Big Mac Index’s regularly published data as well as their own gold price averages for the index month, how many Big Macs one gram of gold could buy in the eurozone over the last 20 years, taking into account, of course, the respective current price.
In 2002, one gram of gold bought 4.11 Big Macs; today, it buys 11.67 Big Macs, or 2.84 times as many. In contrast, when adjusted for inflation, the Big Mac purchasing power of gold has nearly tripled, according to this index.
6. Billy Index
Bloomberg L.P. created the Billy index, which compares the prices of IKEA’s Billy bookshelf in different countries.
The Big Mac index, which tracks the global price of a standard hamburger, is famous for its interpretation of consumer purchasing power. However, a new economic scale arrived in town: the Billy, which is linked to Ikea’s most popular shelving unit. It was developed by a Bloomberg reporter Kristian Siedenburg.
Siedenburg decided to compare the prices of a popular, standard shelf made by Ikea – known as the Billy shelf – in 38 countries around the world, possibly motivated by the fact that Ikea has been accused of being the McDonald’s of the furniture industry. Where the Big Mac is pricey, the Billy shelf can be inexpensive.
The Billy shelf is the cheapest in Dubai, United Arab Emirates, where it costs the equivalent of $47.64. The shelf, on the other hand, is the most expensive in Israel, costing $103.48. The average price around the world is $60.09, with Norway coming in around the middle at $60.15. Switzerland is lower on the scale, and Britain is a bargain, with the Billy costing only $49.34 there.
The Billy shelf scale is not without flaws. Economists will argue that the bookshelf is not a suitable consumer good for measuring general well-being. Ikea’s shelf prices remain constant for a year, and far too few are purchased, making the Billy a less reliable tool for economic measurement.
The views expressed in this article are those of the author alone and not the WorldRef.
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