Big Mac Index

Big Mac Index in July 2018

The Big Mac Index is an indicator that compares the purchasing power of different currencies based on the prices of a Big Mac in different countries. It was invented in 1986 by the British weekly newspaper The Economist to enable an easily understandable currency comparison on the basis of purchasing power parities and to show over- and undervaluation of individual currencies. Since then, it has been regularly surveyed and also cited in scientific studies and textbooks.

For this purpose, the prices of a Big Mac, a cheeseburger variant from McDonald’s , are recorded in the local currencies of various countries. By converting the respective currency to the current US dollar rate , the purchasing power of the currencies is compared with one another in a simplified manner.

The Big Mac is used here as a simple indicator of the purchasing power of a currency because it is available in standardized size, composition and quality in many countries around the world. The currency comparison is based on the assumption that the prices for an identical good will be the same in all countries in the long term.

History and basics

The index was developed in 1986 by economist Pamela Woodall, who was then a correspondent for the Economist. In 1993 she became the business editor there and in 2006 took over the Asian economics department.

The basis for the comparison of purchasing power of the currencies to each other has one of the oldest considerations of international macroeconomics : the purchasing power parity (PPP, English Purchasing power parity , PPP), by David Ricardo developed and other British economists of the 19th century.

A Big Mac

Law of price uniformity and purchasing power parity

The law of price uniformity provides the basis for purchasing power parity theory . It says that a homogeneous good has no price differences in two countries as long as there is a perfect market . This assumes, among other things, that there is complete free trade between the countries and that there are no transaction costs (e.g. in the form of transport and insurance costs).

In the case of a homogeneous good that has price differences in country 1 and country 2 after conversion using the respective exchange rate in a uniform currency, exploiting the price differences between the countries ( arbitrage ) leads to the implementation of the law of price uniformity for homogeneous goods. This means that goods can be bought more cheaply in one country and sold in another country to maximize profit. The consequence of this arbitrage is that the goods are sold to the importing country in a profit-maximizing manner until the price for these goods falls to the actual price level of the exporting country .

Applied to a case of more goods, one speaks of purchasing power parity when the purchasing power of two currencies, measured using an index of different goods prices, is the same.

Purchasing power parity exchange rate

The exchange rate based on purchasing power parity is the (hypothetical) exchange rate at which the real prices of goods in the two currency areas under consideration correspond to a uniform price level. As a result, the actual exchange rate should align itself with the PPP rate in the long term. Expressed as a formula, this means:

${\displaystyle P={\frac {P^{*}}{W}}}$,

in which

• ${\displaystyle P}$the price of a given shopping basket in Germany and
• ${\displaystyle P^{*}}$the price of the corresponding shopping basket abroad is and
• ${\displaystyle W}$is the nominal exchange rate between the two countries, expressed in . ${\displaystyle {\frac {\text{Preis der inlaendischen Waehrung}}{\text{Einheiten der auslaendischen Waehrung}}}}$

Example: If a liter of Coca-Cola costs an average of 2.50 euros in Europe and an average of 1.60 dollars in the USA, the PPP for this homogeneous good between Europe and the USA would be . In Europe you have to pay 1.56 euros for every dollar that is spent in the US for a liter of Coca-Cola in order to get the same quantity and quality of this drink. ${\displaystyle {\frac {2{,}50}{1{,}60}}=1{,}5626}$

Definition and nature of the Big Mac Index

In the case of the Big Mac Index, the shopping cart consists of only one good that is available in over 140 countries: the Big Mac from the McDonald's restaurant chain. For more than 50 years, the hamburger has consisted of the same ingredients almost everywhere internationally due to strict requirements through franchise agreements : sesame rolls, minced beef, processed cheese, lettuce, pickles, onions and sauce. For cultural reasons , different ingredients are used in some countries. In India z. For example, the "Maharaja Mac" has the same shape as the Big Mac, but consists of sesame rolls, grilled chicken, lettuce, processed cheese and janchi sauce.

In the study by The Economist , the prices for a Big Mac in different countries are recorded in the domestic currency and are made comparable by converting them to the current exchange rate in US dollars.

The Big Mac could also reflect the domestic purchasing power of an economy through McDonald’s strategies of using ingredients from the area and winning well-known brand manufacturers as suppliers .

International comparison

(For Germany and Austria see "Eurozone")

Big Mac index of different countries (as of July 2018)

country	Big Mac price in US dollars		Big Mac price in domestic currency *	Exchange rate (as of July 1, 2018)	Over / undervaluation in percent
United States	5.51	5.51	U.S. dollar	1.00	0.0
United Arab Emirates	3.81	14.00	Dirham	3.67	−30.8
Argentina	2.71	75.00	peso	27.73	−50.9
Australia	4.52	6.05	dollar	1.34	−18.1
Azerbaijan	2.32	3.95	Manat	1.70	−57.9
Bahrain	3.16	1.20	dinar	0.38	−42.6
Brazil	4.40	16.90	real	3.84	−20.1
Canada	5.07	6.65	dollar	1.31	- 8.0
Switzerland	6.54	6.50	Francs	0.99	18.8
Chile	4.05	2,640.00	peso	651.73	−26.5
People's Republic of China	3.10	20.50	Renminbi yuan	6.62	−43.8
Colombia	4.14	11,900.00	peso	2,874.07	−24.9
Costa Rica	4.03	2,290.00	Colón	567.80	−26.8
Czech Republic	3.40	75.00	Crown	22.06	−38.3
Denmark	4.72	30.00	Crown	6.36	−14.4
Egypt	1.75	31.37	lb	17.91	−68.2
€ euro zone	4.74	4.04	Euro	0.85	−14.1
United Kingdom	4.23	3.19	lb	0.75	−23.2
Guatemala	3.34	25.00	Quetzal	7.49	−39.4
Hong Kong	2.55	20.00	dollar	7.85	−53.8
Honduras	3.54	85.00	Lempira	23.99	−35.7
Croatia	3.33	21.00	Kuna	6.31	−39.6
Hungary	3.07	850.00	Forints	276.43	−44.2
Indonesia	2.19	31,500.00	Rupiah	14,360.00	−60.2
India	2.51	173.00	rupee	68.83	−54.4
Israel	4.68	17.00	Shekel	3.63	−15.1
Jordan	2.75	1.95	dinar	0.71	−50.2
Japan	3.51	390.00	yen	111.25	−36.4
South Korea	4.03	4,500.00	won	1,116.00	−26.8
Kuwait	3.47	1.05	dinar	0.30	−37.0
Lebanon	4.30	6,500.00	lb	1,511.00	−21.9
Sri Lanka	3.64	580.00	rupee	159.27	−33.9
Moldova	2.58	43.00	Leu	16.65	−53.1
Mexico	2.57	49.00	peso	19.05	−53.3
Malaysia	2.10	8.45	Ringgit	4.02	−61.9
Nicaragua	3.26	103.00	Cordoba Oro	31.59	−40.8
Norway	5.22	42.00	Crown	8.04	- 5.2
New Zealand	4.23	6.20	dollar	1.46	−23.2
Oman	2.73	1.05	Rial	0.38	−50.5
Pakistan	3.09	375.00	rupee	121.49	−44.0
Peru	3.21	10.50	Nuevo Sol	3.27	−41.8
Philippines	2.62	140.00	peso	53.49	−52.5
Poland	2.74	10.10	Zloty	3.69	−50.3
Qatar	3.30	12.00	Riyal	3.64	−40.2
Romania	2.32	9.20	Leu	3.97	−58.0
Russia	2.09	130.00	ruble	62.14	−62.0
Saudi Arabia	3.20	12.00	Riyal	3.75	−41.9
Singapore	4.28	5.80	dollar	1.36	−22.4
Sweden	5.83	51.00	Crown	8.75	5.8
Thailand	3.59	119.00	Baht	33.17	−34.9
Turkey	2.28	10.75	lira	4.71	−58.5
Taiwan	2.27	69.00	dollar	30.37	−58.8
Ukraine	1.91	50.00	Hryvnia	26.20	−65.4
Uruguay	4.47	140.00	peso	31.31	−18.8
Vietnam	2.82	65,000.00	Đồng	23,039.50	−48.8
South Africa	2.32	31.00	edge	13.36	−57.9

* all currencies are given in the singular .

Over / undervaluation of a currency

With the help of Big Mac prices, the Economist shows the over- and undervaluation of individual currencies and thus wants to refute the thesis of the prevailing equilibrium on the international currency market . An over- or undervaluation occurs when domestic goods are more expensive or cheaper than equivalent goods abroad due to the current exchange rate.

The percentage ( ) of over / undervaluation is therefore: ${\displaystyle x}$

${\displaystyle x=\left({\frac {{\text{KKP-Kurs}}-{\text{WK}}}{\text{WK}}}\right)\cdot 100\,\%}$

With

• ${\displaystyle WK}$: the nominal exchange rate of the domestic currency in US dollars

If the price of a Big Mac is used as the sole calculation variable for a “fair” exchange rate, then the current price of the Swedish krona against the US dollar on the foreign exchange market is almost “fair” with a slight overvaluation of 5.8%. In contrast, the Swiss franc is a strongly overvalued currency. According to the Big Mac index from January 2016, the Venezuelan bolivar and the Russian ruble are particularly cheap. In Venezuela, according to the index, the currency is undervalued by around 86.5% and in Russia by around 69% against the US dollar.

Critical consideration

The Big Mac index is only a very rough indicator for estimating purchasing power parities.

In the short term, exchange rates are determined not only from price developments and flows of goods, but also from currency speculations and interest rate differentials between currency areas, economic developments and political factors. A clear representation of the purchasing power by converting the burger prices with the current exchange rate is not possible in the short term.

Even if the index is to be used for a long-term view, its informative value is limited. The Big Mac prices are a simple measure to compare the price level customary in the country. However, there are a number of factors influencing the price that cannot be traced back to local purchasing power. The price is also determined by the regionally different costs of hamburger production and the respective market situation:

• customary local procurement costs (transport)
• Labor costs
• Trade barriers
• Rental and energy costs
• Level of prosperity in a country
• domestic demand
• Intensity of competition among fast food restaurants in a country

The price also influences the location of the restaurant (airport, motorway, city center). The appreciation of the Big Mac is also different in the individual countries. In addition, it is often cheaper to buy national dishes. Because of these factors, local pricing (i.e. the sale of the Big Mac in different regions at different prices) is a rational measure for the company as part of its profit maximization .

Another decisive factor why there is no world market price for Big Macs is that the burger cannot be traded. It alone prevents arbitrage trading. In competition with the Big Mac Index, the Council on Foreign Relations therefore developed its own index in 2013: the Mini Mac Index . This uses the Apple iPad Mini as a reference, which is actually a globally tradable product. A comparison of the two indices actually shows considerable deviations. According to the Big Mac Index, the Japanese yen was undervalued by around 30 percent in January 2017, while according to the Mini Mac Index it was overvalued by around one percent. In general, the Big Mac Index shows significantly greater under- or over-valuation than the Mini-Mac Index.

The Big Mac is also not offered in some countries for religious reasons, so that a similar product is used as a benchmark instead (e.g. India). Due to the fact that burger prices, which are influenced by other factors, form the basis of the Big Mac Index, the purchasing power of historical currencies can obviously not be measured objectively with the index.

Due to its clarity, the theory quickly became popular with the general public and was also continued, for example as the Billy Index (based on the well-known shelf of a Swedish furniture store).

literature

• Kenneth William Clements, Lan Yihui, Shi Pei Seah: The Big Mac Index 21 years on. An evaluation of burgereconomics. (PDF; 1.9 MB) University of Western Australia Business School Economics, Crawley 2007.
• Li Lian Ong: The Big Mac Index. Applications of purchasing power parity. Palgrave Macmillan, Basingstoke 2003, ISBN 1-4039-0310-7 .
• Jiawen Yang: Nontradables and the valuation of RMD, an evaluation of the Big Mac index. In: China economic review 15, 2004, pp. 353–359.

Web links

Commons : Big Mac Index  - collection of images, videos, and audio files

• The Big Mac index. The Economist, accessed January 27, 2015 . 
• iconomix: Big Mac Index 2013. Retrieved February 8, 2013 (What the Big Mac Index is and how to calculate it). 
• Hiroshi Fujiki, Yukinobu Kitamura: The Big Mac Standard: A Statistical Illustration. (PDF; 195 kB) The Institute of Economic Research, Hitotsubashi University , November 2003, accessed on February 28, 2009 (English). 

Individual evidence

1. ↑ ^{a b} The Economist (Ed.): The Big Mac index . July 11, 2018 ( economist.com [accessed July 13, 2018]).
2. ↑ Peter Bofinger : Fundamentals of Economics. Second, updated edition. Pearson Studium, Munich 2007, p. 544.
3. ↑ Interview with the author. In: The Economist ; Retrieved April 8, 2008
4. ↑ Pamela Woodall. Minds Agency, accessed July 13, 2018 . 
5. ^ Paul Krugman , M. Obstfeld: Internationale Wirtschaft. 7th, updated edition. Pearson Studium, Munich 2006, p. 478.
6. ↑ ^{a b} U. Baßeler, J. Heinrich, B. Utecht: Economics. 18th edition. Schäffer-Poeschel Verlag, Stuttgart 2006, p. 579.
7. ^ Gabler Wirtschaftslexikon. 16th edition. Business publisher Dr. Th. Gabler, Wiesbaden 2005, p. 1663.
8. ^ PR Krugman, M. Obstfeld: Internationale Wirtschaft. 7th, updated edition. Pearson Studium, Munich 2006, p. 490.
9. ↑ Purchasing power parity: further definition. Processing status: November 23, 2007, accessed on May 22, 2008
10. ↑ Big Mac states 1968 as the start
11. ↑ McDonald's: Ingredients for US burgers. Processing status: April 8, 2008; Retrieved April 16, 2008
12. ↑ P. Bofinger: Principles of Economics. 2nd updated edition. Pearson Studium, Munich 2007, p. 544.
13. ^ About The Economist. In: The Economist ; Retrieved April 6, 2008
14. ↑ Sophie Crocoll: The Big Mac method . In: The time . No. 37 , 2012 ( zeit.de ).
15. ↑ Big Mac Index (full data set). ( xls ; 388 kB) The Economist , accessed on January 6, 2019 (sheet “Jul2018”). 
16. ^ PR Krugman, M. Obstfeld: Internationale Wirtschaft. 7th, updated edition. Pearson Studium, Munich 2006, p. 491.
17. ^ Gabler Wirtschaftslexikon. 16th edition. Business publisher Dr. Th. Gabler, Wiesbaden 2005, p. 1664.
18. ↑ Big Mac vs. Mini Mac. Makronom , September 21, 2016, accessed September 22, 2016 . 
19. ↑ Ralf Heidenreich: Big Mac or Mini Mac? - Burger and iPad Mini also serve as an index for comparing purchasing power . In: Allgemeine Zeitung Mainz , January 18, 2017, p. 8
20. ↑ Tim Harford: How Ikea's Billy bookcase took over the world . In: BBC News . February 27, 2017 ( bbc.com [accessed August 14, 2017]).

This version was added to the list of articles worth reading on May 28, 2008 .