The Economist invented the Big Mac Index in 1986 to better demonstrate Purchasing Power Parity (PPP). But does The Economist actually eat the Big Macs in their study? The Big Mac Index assumes parity in value; but I disagree, because Big Macs around the world are not equal in yumminess.
What is PPP? Investopedia defines it as:
An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency’s purchasing power.
In layman’s terms; if a basket of goods and services is worth US$100 in the United States and an identical basket of goods and services is worth only US$ 77 in the Philippines at current exchange rates, then the Philippine Peso (PHP) is undervalued by 23 %.
Unfortunately, many people in the world no longer use baskets, and deciding which good makes it to the basket may be contentious. Since McDonald’s (see MCD:US latest stock quote), the company that serves Big Macs, can be found in most countries, using the burger as a proxy for the “basket of good and services” makes sense. Of course, the Big Mac method is not accurate; but according to The Economist, this makes the PPP theory more “digestible”.
Digestible? Did The Economist staff actually eat the Big Macs? Do The Economist writers actually eat at McDonald’s? In my opinion, some Big Macs are yummier than others.
Here is a rundown from Big Macs from around the world, and a depiction of the countries’ under/ over-valuation against the US Dollar:
Big Mac from New Haven, Connecticut, United States of America. Average Price: US$ 4.79
My friend spaceofjase liked this burger from New Haven. My opinion: I ate an American Big Mac in Chicago. As the city is the location of franchise no.1, Chicago didn’t mess this up for me. The US Dollar is our base currency here by the way. Continue reading The Big Mac Index and Purchasing Power Parity: Which Big Mac is Actually the Yummiest?
Finance, M.D. thefinancemd.com 