When U.S. senators consider whether to respond to an undervalued Yuan, they can check the most recent Big Mac Index. Big Macs are 49% cheaper in China than in the U.S. According to The Economist, we would pay $3.58 for a Big Mac here and the equivalent of $1.83 in China. An easy way to see the relative value of the dollar, the Big Mac Index lists prices in countries that include Japan ($3.54), Norway ($6.87), and Saudi Arabia ($2.67).
The Maharaja Mac, sold in India, is not included in the Big Mac Index because it has a chicken patty instead of beef. In Israel, at kosher McDonald’s, Big Macs are also not listed in the index because the cheese is excluded.
The Economic Lesson
The Big Mac Index is all about purchasing power parity (PPP). Saying that the Big Mac Index provides “food for thought,” a paper from the St. Louis Fed describes purchasing power parity as a foundation of international economics. Usually based on a “market basket” of goods and services, PPP helps us to compare currencies and predict how their value will change if their purchasing power is not equal. As I mention in a 1/07/10 post, Timothy Taylor presents an excellent PPP discussion in “America and the New Global Economy,” Part 1.