Although foreign exchange rates often fluctuate, their values don’t always properly represent the purchasing power they wield. As an example, having $100 dollars worth of pesos in Mexico might get you a lot more than $100′s worth of goods by American standards. Or, given the current state of the American dollar, vice versa.
To simplify this idea of purchasing power parity the Big Mac Index evaluates what it costs to buy a Big Mac hamburger from McDonald’s in 120 countries around the world.
According to the Economist‘s own explanation:
“The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.”
To calculate a local Big Mac PPP exchange rate, divide the cost of one Big Mac in a country by the cost of another Big Mac in a different country. Then compare the solution to the actual official exchange rate between those two countries to determine if the exchange rate is too high or too low.
“For example, suppose the price of a Big Mac is $2.50 in the United States and £2.00 in the United Kingdom; thus, the PPP rate is £2.00/$2.50 = 0.80 pounds/dollar. If, in fact, £0.50 buys $1 (or £1 buys $2.00), then the dollar is under-valued by £0.30 (£0.80 – £0.50), or 38% (£0.30/£0.80) in comparison with the price of the Big Mac in both countries.” – Economist
Today the Big Mac Index has been expanded by the UBS investment bank to include information about how many hours a local employee must work to earn enough to money to purchase 1 Big Mac. In Tokyo, on average it takes a worker about 10 minutes to earn enough money to buy a Big Mac. 2nd place is LA, where it will take you about 11 minutes to buy the big one. Compare that to cities like Bogota- Colombia, Nairobi- Kenya and Jakarta-Indonesia where you’ll have to work for around 95 minutes to buy one measly Big Mac. It doesn’t even seem worth it at that point.
According to the official current Hamburger Standard chart, the most expensive place in the world to buy a Big Mac is in Norway because it will cost you $7.77 (or 40 Kroner in local money). The cheapest place to find these delicious burgers is in Malaysia where you’ll only have to fork over $1.67 ( or 5.5 Ringgit in local money).
Of course, the Big Mac Index isn’t perfect. Some of it’s limitations include not factoring in local taxes, levels of competition, social status of fast food and import duties. Also, in many counties eating fast food from an American style restaurant such as McDonald’s is significantly more expensive than eating at a localized establishment. Plus aren’t people in India not a big fan of eating burgers made out of the sacred cow? So that’s another miss.
In spite of it’s obvious limitation, the Big Mac index has prevailed as a popular way of simplifying and monetizing the value of money around the world.
Economist: Big Mac Index, July 29, 2008
OANDA: The Hamburger Standard, July 24, 2008