Juicy, flavorsome, and chock full of your favorite ingredients. A burger is comfort food at its finest, and a global food icon par excellence. But have you ever seen it as an economic index that can be used around the globe? On one particularly hungry evening, the savants at The Economist dreamed up using a Big Mac as an economic tool, perhaps over some burgers and fries.
The idea is simple; burger prices around the world could be a quick and easy way to compare if a currency is overpriced or undervalued. How does that make sense, you ask? Well, how couldn’t it? Given McDonald’s worldwide reach, and assuming unit costs to produce a Big Mac (or a Maharaja Mac or if you’re in India) would be similar, it would fairly reflect the cost of raw materials, taxes, labour, input costs, overheads, and so on.
Let’s understand this with an example. Let’s say a Big Mac costs £3.19 in Britain and $5.51 in the United States – if you were to divide the local price in Britain by the US price, you’d get a Big Mac index exchange rate of 0.58. If you then compared it to the foreign exchange rate, which is 0.71 at the time of writing this, you would find that the pound is undervalued because of the difference between these two exchange rates.
Take it with a grain of salt, but the Index was devised as a tool to make exchange theories and rates more palatable. In reality though, it helps better under Purchasing Power Parity (or PPP), and better understand consumer disparities around the world.
However, keep in mind that any number of factors could upend the underlying factors of this slightly tongue in cheek index. Production and labour costs could come into consideration, as also, advertising, availability, or variables such as rent and wages. And what about countries like India, where a Big Mac is made from chicken instead of beef, lest the gods be offended?
The writing is thus on the wall; take the Big Mac easy, and not too seriously. And if there’s a dip (in currency), buy it. Because nothing goes better with a Big Mac (Index) than an accompanying dip.