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Hamburger Economics

by Elaine Schwartz    •    Aug 3, 2014    •    438 Views

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The 2014 Big Mac Index is out and not much has changed. Norway’s Big Macs are most expensive and Chinese Big Macs are cheap.

As The Economist explains, starting in 1986, they wanted to take a lighthearted look at whether currencies were “at their right level.” Economically speaking, they were considering purchasing power parity (PPP). When a market basket of goods and services costs the same in different countries, then people have equal purchasing power (aka: purchasing power parity). Looking below, you can see that Australia and the United States have pretty similar PPPs for hamburgers.

When countries do not have purchasing power parity, we can use a base currency to check for over- and undervaluation. If the base is a $4.79 US Big Mac, then a $7.79 Norwegian Big Mac is overvalued. By contrast, China’s $2.89 Big Mac says their currency is undervalued.

Below, with the US dollar as the base currency, you can see how Big Mac prices vary.

From: The Economist

From: The Economist

 

Whereas the map shows a range for under- and overvaluation, I used The Economist’s interactive graphic to identify specific prices and per capita GDPs:

Foreign Exchange and the Big Mac Index Purchasing Power Parity

Date from: The Economist

 

Taking the Big Mac Index a step further, a financial services firm, ConvergEx Group, compared it to the minimum wage in different countries. (Note that the following prices and wages are from August 2013.) Their goal was to see how long people had to work to buy their Big Mac:

Foreign Exchange and the Big Mac Index

From: IB Times

 

Our bottom line: The Big Mac Index is a handy first step in understanding the information that foreign exchange rates can provide.

Sources and more...The 2014 Big Mac Index has a rather addictive interactive feature for global Big Mac prices while my Big Mac wage index came from the IB Times. Then, complementing the indices, this brief St Louis Fed paper provides some insight about hamburger purchasing power parity. Please note that this post has been slightly edited after appearing and I briefly excerpted a past econlife entry.

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