Economics has been called the “dismal science,” and economists are stereotyped as dour, unsmiling grumps immersed in their data and charts. But sometimes they have flashes of whimsy and caprice.
Such is the case with the “Big Mac Index.” Since 1986 The Economist magazine has published the price of a Big Mac, around the world, in order to compare which currencies appear to be overvalued and which look undervalued. Since Big Macs are perishable and can’t easily be transported across national borders, the Big Mac Index is an intuitive way to present how the notion of purchasing power parity—that a dollar of income in America or China or Norway can buy the same basket of goods—doesn’t hold up very well in practice.
And what does the Big Mac Index show? Not surprisingly, Scandinavia is more expensive than the US, with the “free currencies” of Switzerland, Norway, and Sweden, the most expensive. In those countries a Big Mac costs around $6, about 45% more than the average US price of $4.20. And in the developing world, the iconic McDonald’s sandwich is cheaper. In the Philippines, Hungary, Russia, and Indonesia it costs about $2.50, or 40% less.
But there are a few surprises. A Brazilian Big Mac costs $5.70, almost as much as Sweden, and even in Argentina—the home of gauchos and wide Patagonian plains—it costs $4.60. And across much of the Euro area—a multi-city average—the two all beef patties cost approximately the same is over here, in spite of their higher permitting costs and more rigid labor requirements.
To be sure, not all the variation in price is due to currency factors. Differing labor costs, the cost of sourcing local ingredients, and advertising expenses will vary from place to place. Still, it gives an intuitive picture of how fairly valued currencies are. And it can make changes in exchange rates a little more digestible.
Douglas R. Tengdin, CFA
Chief Investment Officer
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