What ’ s better than a juicy burger ? Another juicy burger or two , for free , that ’ s what ! The catch ? You might need to move halfway around the world to get the deal . Welcome to the lip-smacking , number-crunching , bap-flipping world of burgernomics !
What ’ s better than a juicy burger ? Another juicy burger or two , for free , that ’ s what ! The catch ? You might need to move halfway around the world to get the deal . Welcome to the lip-smacking , number-crunching , bap-flipping world of burgernomics !
Burgernomics ? I thought this was the Money Maths issue ? Ed
It is ! The word ‘ burgernomics ’ comes from a 1986 article in The Economist magazine . This tongue-incheek piece introduced the world to the Big Mac Index . ( I ’ d have preferred the burger myself , but carry on .) The index uses the McDonald ’ s Big Mac burger to explore exchange rates ( the price of one country ’ s currency in terms of another ’ s currency ) around the world , and in particular something called purchasing power parity ( PPP ).
Easy P-easy
PPP is a theory that says exchange rates should ideally be set so that , once you ’ ve converted to the local currency , a basket of goods in one country costs the same as in another country . So , if you pay £ 100 for a weekly shop in the UK , it should cost the equivalent of £ 100 in France when converted into euros .
fOoD FoR ThOuGhT !
Step 1 – Implied Exchange Rate * A Big Mac in China costs 25 yuan ( CNY ), or ¥ 25.00 A Big Mac in the US costs 5 dollars ( USD ), or $ 5 . Divide the Chinese price by the US price to get the implied exchange rate :
¥ ______ 25.00 = 5 5
So in the Big Mac exchange rate , USD 1 is equal to CNY 5 .
Step 2 – Actual Exchange Rate ** The actual exchange rate ( at the time of writing ) is 7 , i . e . USD 1 = CNY 7 . Step 3 – Over / Undervalued Percentage Calculation Subtract the actual exchange rate from the implied exchange rate , and divide by the actual exchange rate : ( 5-7 ) = -0.29, which is the same as -29 % ____ 7
So , according to the Big Mac Index , the Chinese yuan is undervalued against the US dollar by 29 per cent .
This is tricky ! Could I just have my burger now please ? Ed
This means that to achieve PPP , you would need to adjust the actual exchange rate by reducing it by 29 per cent , e . g . 7 - ( 0.29 x 7 ) = 5 = implied exchange rate . Or you ’ d need to change the price of the burger in China or the US .
How many Big Macs you ’ ll get for the cost of one US Big Mac ($ 5 ) LEBANON
SWITZERLAND UK AUSTRALIA
However , one problem with looking at purchasing power is coming up with a comparable basket of goods . It can be tricky to find , say , 30 different things that are exactly the same in India as they are in China .
Burgers R Us
Step forward the Big Mac Index ! A Big Mac is a Big Mac is a Big Mac . They ’ re sold in over 120 countries around the world , and they ’ re generally the same – a bread bun , a meat filling , lettuce , gherkins and cheese . So it ’ s an easy and reliable thing to compare .
To get the Big Mac Index , you divide the local price of a Big Mac in one currency by the local price of a Big Mac in another currency . This gives an implied exchange rate . When you compare this against the actual exchange rate , this tells you if the currency in that country is undervalued or overvalued . To keep things simple , the Index tends to compare prices against the same currency , the US dollar ($).
CHINA
The price of a Big Mac varies around the world . You can get approximately 1½ Big Macs in China for the price of one Big Mac in the US . Whilst , in Switzerland , you wouldn ’ t even be able to buy one Big Mac with your $ 5 but you could buy two if you travelled to India .
Problems with the Big Mac Index
While the Big Mac Index is a lighthearted way of looking at PPP , it ’ s not entirely accurate . It doesn ’ t consider things like the cost of labour , whether the ingredients have to be imported , how many McDonald ’ s there are in a particular country and whether fast food is seen as a luxury or common item . All these things will affect the price of the burger .
* To keep calculations simple , we have rounded up all figures in our examples . ** Exchange rates correct as of September 2023
EGYPT
INDIA
AWESOME
ACTIVITIES ALERT
SCAN ME
Words : Iqbal Hussain . Illustration : Ed J . Brown
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