How Many Macs Can You Get for A Thousand Bucks Wherever in the World You Just Happen To Be? OR: What is the Big Mac Index?
How expensive or cheap is a Big Mac in the States? in Canada? in England? How about China? Japan? The Philippines? Why would you want to know? Assuming that Big Macs are made according to the same formula around the world, then one should be able to compare the relative buying powers of different currencies. The Big Mac was the only product I could think of that may be uniform enough to compare how far one thousand dollars would get you in various nations across the globe.
Then I discovered that economists had already thought of that and had invented “The Big Mac Index”.
Big Mac Index:
The leading economic journal, The Economist coined the term, The Big Mac Index to allow a comparison of the relative accuracy of the world’s currencies.
It works like this: You can calculate the price of a Big Mac in dollars by multiplying the cost in the local currency by the exchange rate. If in dollar terms, the Big Mac costs significantly more or less than it would in the USA, the currency is thought to be out of synch with its true value. In other words, if the Big Mac is “too cheap”, then the local currency is assumed to be undervalued. Likewise, if the Big Mac is too expensive, then the local currency is assumed to be overvalued.
Economists actually use a more complicated formulation than this, but this should suffice for us nonprofessionals.
How Much Does a Big Mac Cost in Dollar Terms in Countries Around the World?
These figures are based on July 2011 exchange rates in a table published by The Economist.
USA – $4.07
Canada – $5.00
Britain – $3.89
China – $2.27
Denmark – $5.48
India – $1.89
Israel – $4.67
Japan – $4.08
Mexico – $2.74
Norway – $8.31
Philippines – $2.78
Saudi Arabia – $2.67
Switzerland – $8.06
Turkey – $3.77
The Problem with The Big Mac Index:
While economists using the Big Mac Index consider in their calculations differential labor costs and other indices, there are further disparities that reduce its ability to assess the accuracy of national currency exchange rates.
For example, while recipes are supposed to be consistent throughout the world, it is recognized that this is not true. For example, India does not eat beef. Therefore their Big Mac does not contain beef.
Interestingly, fast food restaurants are cheap restaurants in some countries, but not in others. Local African or Asian food, for example, may sell more cheaply, making McDonald’s an expensive family outing in some places.
Furthermore, in the United States, itself, the same hamburger may be priced more expensively in large urban areas than in rural regions. Similarly, in some developing countries McDonald’s may offer their menus up for lower prices in line with what the local population can afford.