Alternative Indicator: The Big Mac Index
A Big Mac can do much more than satiate our appetite for burgers that require three pieces of bread: it can give us a lens through which to compare and contrast the purchasing power of all the world's currencies. Since The Economist first ran the index in 1996, the BMI has given us a new way to visualize currency exchange rates.
What is it?
In the U.S. as of October 2010, the average price of a Big Mac was $3.71. The most expensive Big Mac hailed from Switzerland, where it costs the equivalent of $6.78, followed by Brazil, where one Big Mac costs $5.26. China offers one of the cheapest Big Macs in the world: there you can purchase one for the equivalent of $2.18.
What does it measure?
The Big Mac Index is a simple, informal way of quantifying the purchasing power parity between two currencies. We Americans know the relative value of a Big Mac in our country; the BMI allows us to compare Big Mac prices in US dollars to get an idea of the relative values of different currencies.
How do they get there?
The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is undervalued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is overvalued.
What can it tell us (really)?
What the Big Mac Index does is recontextualize PPP theory so that we McDonald's-devouring masses can understand what exchange rates mean and how they translate into actual purchasing power in different countries with different currencies.
But nobody's perfect
The Big Mac, while useful as a basis of comparison because of its global ubiquity and overall cheapness, is not the perfect good to use to compare purchasing power across different countries. For instance, you'll find that in general Big Macs run relatively more expensive in other countries than in the U.S. In Brazil, it's a lot cheaper to eat at a local restaurant than at McDonald's. Further issues are that Big Macs are marketed and even made differently in different parts of the world; in predominantly-Hindu India, there are no beef burgers; a Big Mac there is the chicken Maharaja Mac.
These discrepancies have resulted in the creation of other similar indexes, like The Economist's 2004 version called the Tall Latte Index, which replaced the Big Mac with a cup of Starbucks coffee as a means of comparison.
October 22, 2010: McDonald's Ups Prices