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The Big Mac Index

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2 minute read

Have you ever wondered how McDonald’s prices differ across borders? These differences can give you insight into currency valuation.

 

McDonald’s operates in over 100 countries, with just as many prices on their menus. An article in the British magazine The Economist introduced the Big Mac Index in 1986. This displays the purchasing power in different countries by showing how many Big Macs can be bought with $50 USD. In 2012 this amount ranged from 7 Big Macs in Norway or Switzerland, to 30 in India.

 

The next step makes it more interesting. Simply cross-reference GDP per person with the earlier purchasing power measurement. The theory behind this is that a Big Mac ought to have a similar price when currency exchange is factored in. If two countries have the Big Mac at the same price in $US, but one country’s citizens earn twice as much, you can say that country charges half the relative price.

 

The prices are not always what you would expect. As of 2011 some standouts are Brazil and Argentina, with prices far above what exchange rates would suggest. In Brazil they pay $6.14 USD for a Big Mac (or about 50% over US prices). Adjusted for GDP per person, Brazilians pay 2.5 times the US price. Mexico, China, Russia, and India all are in the same boat as Brazil, with their exchange vs GDP price comparisons. However the gap is smaller and prices are lower in an absolute sense. Though not a highly thorough system, it leads to the conclusion that these currencies are undervalued.

 

There are fewer countries on the other side of this coin. The main one is Switzerland, with Sweden and Australia also showing signs of being overvalued in this comparison.

 

So if you are American, next time you have a Big Mac you can appreciate that the cost in earnings is second only to India. Don’t start beef with India though, because their McDonald’s doesn’t even serve beef. Get a Chicken Maharaja Mac instead. It only costs $1.89 USD.

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