Hamburger Helpers

What can hamburgers teach us about economics?

Photo: Phil Grey. Source: Needpix. CC0

Around the world, the McDonald’s Big Mac is a model of consistency. Whether we walk into a McDonald’s in Beijing or Brussels or Bogota, we’re going to see the same combination of beef patties, cheese, condiments, and a bun. That formula has been so successful that it’s offered in 36,000 restaurants in over 100 countries.

Starting in 1986, Economist magazine started tracking Big Mac prices around the world, as a lighthearted way to how currencies compare with one another. After all, since the ingredients are largely the same, shouldn’t the prices be comparable? It depends on how the currencies stack up.

In New York a Big Mac will cost around $5.75, while in Moscow we’d only have to pay $1.65, suggesting that the Russian Rouble is 70% undervalued relative to the US Dollar. But in Zurich, Switzerland, we’d have to fork over $6.60, suggesting the Swiss Franc is overvalued by 15%. This makes intuitive sense: the Franc is expensive since many investors use it to hedge the risk that the Euro might break up. Conversely, the Rouble is generally pretty weak against the dollar. And the dollar has been especially strong lately, mirroring the strength of the US economy compared with the rest of the world.

Big Mac Index over time. Source: Economist

To be sure, not all price variation is due to currency factors. Different labor costs, the cost of local ingredients, and other expenses like real estate and ads vary from place to place. Still, it us gives an intuitive picture of how fairly valued currencies are. And it can make any changes in exchange rates a little easier to swallow.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2019-07-29T06:32:34-05:00July 29th, 2019|Global Market Update|Comments Off on Hamburger Helpers

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