The Big Mac Index

As some of my most loyal readers might remember, during my travels I strictly tracked the cost of a Big Mac in a major city in all countries I visited. The Big Mac Index is commonly used by economists as a means to compare purchasing power. In theory, McDonald's operates in most countries in the world, so Big Mac prices are easily comparable. Although this method receives large amounts of criticism (ie McDonald's doesn't exist in places like Bolivia, prices ignore marketing or regional popularity, etc), it's still a recognizable tool. Since my blog has promoted this theory (more because of my own curiosity than for my belief in the index), I feel responsible to post a short piece from The Economist (10/15/2010) on the subject. We live in a great world when respectable economic news sources use cheese burgers to explain world trade and China's currency manipulation.

Why China needs more expensive burgers

A WEAK currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America the same burger averages $3.71. That makes China’s yuan one of the most undervalued currencies in our Big Mac index, which is based on the idea of purchasing-power parity. This says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. At just $0.15, it is undervalued by about 40%. The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.

The Big Mac Index