What’s the first thing that comes to mind when one sees the words Big Mac Index? An index of annual burger consumption? An index of the prevalence of fast food establishments in different countries? Who could have thought that the Big Mac Index is directly related to the economy and only indirectly related to burgers.
The Economist magazine has been publishing its Big Mac Index annually since 1986, comparing economies, or rather currencies, against purchasing power parity. In theory, a currency should equalize the cost of a market basket of goods across different countries. But instead of a standard basket of goods, the creators of this Index, as the name implies, use the cost of a McDonald’s Big Mac in different countries. In general, the Big Mac Index shows how fair the current exchange rates are. The choice of product is quite logical – McDonald’s exists in almost every country and the Big Mac includes staples of every economy, like bread, vegetables, meat, and cheese. The existence of both factors makes the research results quite representative.
Take, for example, index data from June 2013. In Russia, the Big Mac cost $2.64, while in the U.S. it was $4.56 and, given that the official exchange rate of the Central Bank of Russia at the time was 32.94 rubles to the dollar (July 3), the purchasing power of the dollar for a Big Mac was $1 to 19.09 rubles. In other words, the U.S. dollar shouldn’t be traded at 32.94 rubles, but at 19.09. Based on these calculations, The Economist analysts concluded that the ruble was undervalued by 42% against the dollar. Meanwhile the Chinese yuan was undervalued by 43% against dollar, according to the Big Mac Index. The most undervalued currency was the Indian rupee, whose exchange rate against the dollar was undervalued by 67%.
The most expensive Big Mac was in Norway at $7.51. And according to the Big Mac Index, the Norwegian krone was the most expensive currency in the world, overvalued at 65%.
As for the euro, the index showed that the single currency for the 17 countries that make up the Eurozone was overvalued by 2%. The cost of a Big Mac fluctuated from country to country within the Eurozone between €2.60 and €4.10 ($3.34 and $5.27). Therefore, in order to determine how fair the euro’s exchange rate was overall, the index’s creators used a weighted GDP of the Eurozone member countries to come up with an average burger cost ($4.66). The most expensive Big Mac in the Eurozone was in Finland, overvalued by 16%. Also overvalued were France, Italy, and Belgium at 10%, 6%, and 5%, respectively. The cheapest burgers in the Eurozone were in Greece, Estonia, and Portugal. It’s interesting to note that just two years ago, the Greek euro was overvalued by 15% according to the index, but this year it was undervalued by 27%. This decline is primarily due to Greece’s economic problems, which have led to a decline in labor costs. In the first quarter of last year alone, wages in Greece fell 10% from the same period in 2012.
The Big Mac Index wasn’t originally conceived as a tool to accurately measure the dynamics of foreign currency changes, but to clearly explain the theory of exchange rates. But over time, the Big Mac Index has become a global model, even explained in several economic textbooks, and has been the subject of research in more than 20 academic publications.
Text: Christopher Stein