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.
Verdict: Currency – Fairly Valued (obviously); Big Mac Yumminess – 8/10
Big Mac from Seoul South Korea. Average Price: US$ 3.78
“Just ok, nothing special”, according to my friend spaceofjase. It’s undervalued by 21% though according to the Big Mac Index, so I guess it’s better than ok. My opinion: While I was eating the Seoul Big Mac, I was imagining eating bibimbap instead.
Seoul has always been known as a very expensive city to live in. I’m surprised that the Bic Macs there are cheaper.
Verdict: Currency – undervalued by 21%; Big Mac Yumminess – 7/10
“Big Mac” aka Chicken Maharaja Mac from Chennai India. Average Price: US$ 1.89
“This is not a Big Mac. I don’t like it – and it’s not because its chicken. It would have tasted just as bad if it were made of beef “ according to my friend spaceofjase. My opinion: I haven’t been to India.
Because of Indian culture, Big Macs had to be reinvented – as chicken – for Indian consumers.
Verdict: Currency – undervalued by 61%; “Big Mac” Yumminess – 1/10
Big Mac from Beijing, China. Average Price: US$ 2.77
“Tastes like paper”, according to my friend spaceofjase. “The Chinese invented paper, duh!”, I replied. My opinion: I haven’t visited China. Given that I love Chinese food, I wouldn’t even think of eating at a McDonald’s when I finally go to China.
Critics of China believe that the Yuan is purposely undervalued to make Chinese exports cheaper. Is the taste of the Beijing’s Bic Mac purposely undervalued as well?
Verdict: Currency – undervalued by 42%; Big Mac Yumminess – 4/10
Big Mac from Jakarta Indonesia. Average Price: US$ 2.24
“Juicy, the best Big Mac ever!”, exclaims my friend spaceofjase. Since he loves everything Indonesian (he’s Filipino), I’ll take his opinion with a grain of salt. My opinion: I haven’t been to Indonesia.
The Indonesian Rupiah (IDR) seems to be getting more undervalued in recent years. I expected the trend to reverse with the fall in oil prices, but that hasn’t happened yet. The good news is that we can still enjoy the great tasting Indonesian Big Mac.
Verdict: Currency – undervalued by 53%; Big Mac Yumminess – 9/10
Big Mac from Bangkok, Thailand. Average Price: US$ 3.04
“Nothing special”, according to my friend spaceofjase. In my opinion, there are better things to eat in Thailand than a Big Mac.
The Thailand Baht (THB) is undervalued by around 37%, but its value has been steadily going up in recent years. Nevertheless, tourists still flock to Patpong.
Verdict: Currency – undervalued by 63%; Big Mac Yumminess – 6/10
Big Mac from the Philippines. Average Price: US$ 3.67
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Though I like the Big Mac in the Philippines, I actually like the McDonald’s Quarter Pounder better. In my opinion, there are better burger options – for the same or lower prices – from other restaurants here in my country.
According to the Big Mac Index, the Philippine Peso (PHP) is less undervalued than the Singapore Dollar (SGD) and all the other currencies of SouthEast Asia. I worry about the Philippines’ competitiveness.
Verdict: Currency – undervalued by 23%; Big Mac Yumminess – 7/10.
The Big Mac Index has flaws. First, McDonalds’ positioning varies around the world. Among developed countries, Bic Macs may be cheap food. However, in developing countries (like my country the Philippines), Big Macs are unaffordable for many people.
As a foodie, a big flaw of the Big Mac Index for me is the lack of consistency in the taste of Big Macs around the world. Some say that this is because McDonald’s adjusts to the tastes of the local community.
Whenever I travel and eat a Big Mac, the local cuisines always taste better in my opinion. The local food is also usually cheaper.
Maybe the Big Mac itself is the overvalued one.
– Finance MD
thefinancemd.com
Special thanks to spaceofjase.com and The Economist .
What prices are these? Big Mac alone or the meal with fries and drink?
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