Friday, July 23, 2010

The Big Mac Index

The Economist just published its semi-annual Big Mac Index, which compares the price of a Big Mac around the world and uses that to estimate whether the currency is over or undervalued against the USD.  It is not scientific but it is easy to understand.  The Economist says this:

THE Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalise the price of a basket of goods and services around the world. Our index shows that Asia remains the cheapest place to enjoy a burger, while those on the hunt for a value meal should steer clear of Scandinavia. The euro, despite its troubles, continues to be expensive when compared with many other rich-world currencies, though the British pound is trading close to its fair value. China's recent decision to increase the "flexibility" of the yuan has not made much difference yet—the yuan is undervalued on the burger gauge by 48%. For more on the Big Mac index see article.


5 comments:

  1. And this is supposed to be important because . . .?

    How does this compare to the price of beef in those various countries? (I think that would be a better question, but what do Bears know about anything?)

    Very interesting re-design, BF. Well done. Avatar is peculiar; did you get a truly swine ride from that porker?

    ReplyDelete
  2. FX is important if you are importing or exporting. Which is why Canadian cattlemen are happier when our dollar is 90 cents to the USD instead of at par.

    The longer article says this: The index is a lighthearted attempt to gauge how far currencies are from their fair value. It is based on the theory of purchasing-power parity (PPP), which argues that in the long run exchange rates should move to equalise the price of an identical basket of goods between two countries. Our basket consists of a single item, a Big Mac hamburger, produced in nearly 120 countries. The fair-value benchmark is the exchange rate that leaves burgers costing the same in America as elsewhere.

    The Big Mac numbers should be taken with a generous pinch of salt (my note: salt AND fat, bad combination). They are not a precise predictor of currency movements. The bulk of a burger’s cost depends on local inputs such as rent and wages, which tend to be lower in poor countries.

    Consequently PPP comparisons are more reliable between countries with similar levels of income.

    As you ought to know, the farm gate price of raw meal ingredients is such a tiny percent of the final price of a meal, it hardly matters relative to labour and overhead. Restaurants buy their ingredients already with significant value added. 30 years ago the thumb rule was 3 times cost of ingredients is the price. today it is more like 4 of 5.

    ReplyDelete
  3. But BF you forgot to factor in clogged arteries and health care costs.

    ReplyDelete
  4. Ah, yes; Demeur has raised an excellent point, which may confound the results of the survey.

    ReplyDelete
  5. the difference between neighboring Argentina and Brazil, both beef producing countries, is curious. Does Brazil really have that much higher wages and rents? for Norway I suspect there are not many fast food places so no competition.
    Stan Hingston
    sghingston@sasktel.net

    ReplyDelete