Monday, 13 June 2005

The 2005 Big Mac Index

The Economist's authoritative 'Big Mac Index' has just been released, naturally prompting discussion about the relative strengths and weaknesses of currencies, and the notion of purchasing-power-parity (PPP) which underpins this 'index.' Oddly, no discussion is had on whether or not McD's new Deli Rolls will serve to undercut or supplant the Big Mac Index any time soon.

The cheapest Big Mac is in China and the most expensive in Switzerland. NZ falls in between, with our Big Mac price the closest of those measured to the US, and if these figures are to believed suggesting a 4% over-valuation. The Economist notes also that "the euro buys less burger than it should," "suggesting "perhaps inflexible wages, not a strong currency, are to blame."
The Big Mac index, which ['The Economist' has] compiled since 1986, is based on the notion that a currency's price should reflect its purchasing power. According to the late, great economist Rudiger Dornbusch, this idea can be traced back to the Salamanca school in 16th-century Spain. Since then, he wrote, the doctrine of purchasing-power parity (PPP) has been variously seen as a “truism, an empirical regularity or a grossly misleading simplification.”
The Salamanca school themselves can be considered proto-Austrians; the Mises blog discusses the Salamancan theory of purchasing-power parity and its modern incarnation here.


Blogger Icehawk said...

Asian Labour News assembled their own Big Mac Index, measuring how long a typical McDonalds employee had to work to earn enough to buy a Big Mac.

Australia —17 minutes; New Zealand — 28 minutes; Hong Kong — 41 minutes; Malaysia — 1 hour, 26 minutes; South Korea — 1 hour, 29 minutes; Philippines — 2 hours, 19 minutes; Thailand — 2 hours, 45 minutes; China — 3 hours, 58 minutes; Sri Lanka — 5 hours, 53 minutes; India — 8 hours, 34 minutes; and the winner is Pakistan, where it takes a McDonalds worker 14 hours, 14 minutes to buy a lousy burger.

See Rising Hegemon for details.

13 Jun 2005, 22:30:00  
Blogger Berend de Boer said...

icehawk, very interesting. And really weird numbers.

Because you can get an entire day of meals at McDonald, it would imply that in certain countries you cannot earn enough money to buy food. As they people are working, that implies that is not true, else they wouldn't have the strength to work.

Would that mean burgers in those countries are overvalued? I.e. targeted at "rich" foreigners instead of the local market like in US/NZ? Any insight on that?

14 Jun 2005, 13:23:00  

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