There are different ways to measure global inflation, such as by looking at the CPI, but there is no such surreal and western way of doing it than by taking the price of Big Macs as the basis. Few things are as synonymous with Western culture as the iconic McDonald’s hamburger. Invented in 1957 by one of the company’s earliest franchisees in Pennsylvania, the Big Mac remains the quintessential fast food item. You can buy it in 70 countries around the world.
However, its price will vary depending on where you are. And that’s where our favorite new tool, invented by The Economist in 1986, comes in: the Big Mac Index.
It can be understood as a cheerful guide to know if the coins are at their “correct” level. It is based on the theory of purchasing power parity (PPP), the idea that, in the long run, exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a hamburger) in any two countries.
In other words, it helps illustrate the idea that market exchange rates between countries can be “out of whack” compared to the cost of buying the same basket of goods and services in those places.
Why should you care about all that? Well, the price of a Big Mac has increased a staggering 40% in the last 10 years. And due to what price incorporates multiple economic factorsincluding the cost of labor, transportation, food, and general inflation, leads some to believe that food is a way of understanding current inflation rates and the purchasing power of our currencies.
Covering from 2004 to 2022, this animation by James Eagle shows the US dollar price of a Big Mac in select countries around the world:
Using the price of a Big Mac in two countries, the index can give an indication of whether a currency may be overvalued or undervalued. For example, a Big Mac costs 24.40 yen in China and 5.81 dollars in the United States. By comparing the implied exchange rate with the real exchange rate, we can see if the yuan is overvalued or undervalued. According to the Big Mac Index, the yuan is undervalued by 34%.
Beyond currency misalignment, the index has other uses. For example, it shows the inflation in the prices of hamburgers over time. If we compare the price of a Big Mac across countries in the same currency, such as the US dollar, we can also see where burgers are cheaper or relatively more expensive.
The cost in different countries of the world
In the animation above, all Big Mac prices have been converted from local currency to US dollars based on the current exchange rate. Switzerland takes the cake for the most expensive Big Mac, closely followed by Norway. Both countries have relatively high price levelsbut they also enjoy higher salaries compared to other OECD countries.
Venezuela has seen the biggest jump in hamburger prices, with the cost of a Big Mac rising from almost 250% since 2004. The country has been plagued by hyperinflation for years, so it’s not surprising to see big price swings in the data.
While it appears that the price of a Big Mac has decreased in Turkey, this is because prices are displayed in US dollars. The new Turkish lira has depreciated against the US dollar by more than 90% since it was introduced in 2005. Finally, it’s worth noting that Russia has the cheapest Big Mac, reflecting the country’s lower price levels. The work expenses in Russia there are a third of those in Switzerland.
You can consult the table in its maximum resolution here.
The limitations of Burgernomics
However, the index has deficiencies. Some economists have pointed out that non-traded services may be priced differently across countries. The price of a Big Mac will be influenced by the costs of factors such as labor, but this is not a reflection of relative monetary values. In fact, The Economist already publishes a GDP-adjusted version of the Big Mac Index to help tackle it.
Then McDonald’s it is not in all the countries of the world. This means that the geographic scope of the index has some limitations, particularly in Africa. Also, it lacks diversity. It is made up of one element: the Big Mac. Because of this, it lacks the diversity of other economic metrics like the Consumer Price Index.
Despite all these limitations, the Big Mac Index acts as a good starting point for understanding purchasing power parity. Through the simplicity of hamburgers, complex economic theory is easier to digest.
Graphics: James Eagle | The Economist | Visual Capitalist