How The Price Of Burgers Explain Economics

If you want to know how much your money is worth, try sitting down and grabbing a burger.

Comparing the price of a burger at home and in another country can help determine if two currencies are priced correctly.

The Economist magazine invented Burgernomics to measure purchasing-power-parity (PPP) by assuming that exchange rates between two currencies should eventually level when buying identical baskets of goods.

One example of an identical product in the basket is the humble McDonald’s, Big Mac.

The Big Mac recipe is similar in most countries, although some places have local variations. For instance, in India, beef patties are replaced with chicken. This international consistency means the price is similar in most countries – but not the same.

Burgernomics And Exchanging Money

This cost disparity can suggest what the exchange rate should be and how well or badly a currency is performing.

For example, if a Big Mac costs $5 in the USA but 20 yuan in China, the Big Mac exchange rate is a ratio of $1 to 4 yuan when the actual exchange rate is $1 to 6.4 yuan. This indicates the Big Mac exchange rate is 38 per cent undervalued.

But other factors can impact pricing like the low labour and raw materials cost. To eradicate this PPP anomaly, The Economist adjusts prices against a country’s GDP per person.

To illustrate this, compare the cost of a British and American Big Mac.

In the UK, the price is £3.79, while US consumers pay $5.36. The Burgernomics exchange rate is 0.71, but the actual exchange rate is 0.81, which suggests the British Pound is 12.9 per cent undervalued against the US dollar.

The Big Mac Exchange Rate

The table shows how a selection of currencies compares exchange rates with Burgernomics.

The US dollar is the base rate and enters the table as zero.

According to the data, currencies in the Nordic countries are overvalued, together with the Uruguay peso and Swiss Franc.

Conversely, some leading world currencies, such as the British Pound, Australian and Canadian dollars and the Euro, are undervalued.

Remember, however, this is just an exercise in PPP and not a real-world trading platform.

Burgernomics And Inflation

Economists and academics have long argued about prices and the impact of inflation.

Inflation has outstripped predictions and central bank targets in almost every country for the past two years.

But can Burgernomics step in and offer a solution to the problem of how to control prices?

Because the burger is virtually the same product wherever you are in the world, the price can disclose how inflation affects different countries. That’s the theory, but how does this work in the real world?

In the US, our benchmark for Big Mac pricing, the cost of a burger has increased six per cent to $5.36 in the past 24 months.

The PPP theory indicates that the currency’s value should fall when prices rise. But the dollar has increased in value against most of the world’s leading economies.

The US Federal Reserve says the dollar has risen nine per cent, mainly because raging inflation is stalking many of the USA’s major trading partners. As a result, the price of a Big Mac has increased by 14 per cent in the Eurozone and 15 per cent in the UK., but the US dollar’s rise has swallowed this pricing gap.

A strong currency and hefty inflation is pushing prices in America out of line with those in the rest of the world.

A Big Mac was 26 per cent cheaper in Japan than in the USA only 24 months ago. This suggests the yen was undervalued and should have risen against the dollar. The opposite happened, and the burger is now 40 per cent cheaper in Japan than in the USA.

The Economist explains converting Big Mac prices into US dollars always shows large price differences between countries.

The Big Mac Index

These are the current menu prices of a Big Mac worldwide – although in India, the burger is called a Maharajah.

Big Mac Burgernomics FAQ