How a Big Mac helps us understand Economics

The Big Mac Index is a good example of how Economics can be very accessible -- and just as well -- because the subject applies to so many areas of our everyday lives. If you’ve never heard of it, it’s not a new kind of burger!

Also known as burgernomics, the Big Mac Index was created in 1986 by the Economist magazine, to measure the purchasing power of a currency. The concept is: how much does a Big Mac cost, from country to country, in real terms (having taken into account the exchange rate).

Known as Purchasing Power Parity in macroeconomics, the idea is that you can compare different countries’ currencies by looking at the ability to buy a basket of goods, or in this case, the ability to buy a Big Mac. This in turn tells us about economic productivity and standards of living, in addition to the value of the currency.

Purchasing power is: what you can buy for a set amount of money (also known as the strength of an individual currency). If you look at the price of a Big Mac in a range of countries and then convert them all to the same currency (they are converted to US dollars), you can compare how much it costs from nation to nation.

The reason why it works especially well is not only that it is a widely consumed product across the globe but importantly, it remains exactly the same in terms of ingredients.

The traditional basket of goods that is typically looked at in purchasing power comparisons on the other hand, is a more complex concept that can’t be duplicated precisely. An everyday vegetable that might be found in Japan’s basket of goods for instance, would likely be considered an exotic one in Europe that is rarely eaten.

The relatively simple Big Mac concept can tell us a good deal about an economy. In the US for instance, the double-decker burger's price has risen by a whopping 40% over the last 10 years. Other than the cost of ingredients that go into making the burgers, multiple economic factors such as labour & transportation costs and energy prices, have contributed to this inflation.

“[They are] identical sandwiches and we look and see how they compare in price, once you’ve done the exchange rate conversion at market rates, to a Big Mac in the US,” explains Edward McBride of the Economist.

At the moment, the most expensive Big Mac can be found in Switzerland at $6.98. Next is Norway at $6.39 followed by the US, which despite being the birthplace of the burger, sells it at $5.81 dollars. By comparison, Turkey has one of the cheapest Big Mac’s in the world at $1.86, as do Indonesia and Malaysia at around $2.30.

Other factors that go into the cost of a Big Mac include government interventions (such as tariffs and taxes), market competition from other similar products and fixed costs e.g., rent paid for the premises.

The Big Mac index has become so popular that it is quoted in many Economics textbooks, however, editors at the Economist have stressed that “Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible."

For one thing, it can only be found in 120 out of 195 countries. Some are too politically or economically unstable; several countries won’t allow the fast-food chain to make a presence because of cultural reasons. Others don’t have a solid enough infrastructure to support the running of a McDonalds.

However, despite the Big Mac index being a little bit light in tone perhaps, it does illustrate inflation, currency strength (and other economic factors) well - and in a digestible fashion.

Suggested Links:

The Big Mac index | The Economist

The Big Mac Index in 2022 - A Comparison Table | FXSSI - Forex Sentiment Board

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