Speaking of Burgers – the Big Mac Index

I have a degree in Economics from the University of New England, in Armidale, New South Wales, Australia. I read for that degree when Friedman’s Monetarism and Reaganomics was all the rage and Keynesian economics was generally confined to those academics that had a true grasp of societal greed and the flawed assumptions Friedman based his theories on, not to mention that after periods of tight monetary control, generally inflation boomed.

So, what has economics got to do with burgers. Nothing really other than I started looking at cheeseburgers locally and that led me to think of the Big Mac Index. What started out as a joke has become a standard for measuring the purchasing power of different currencies against a very standard basket of goods, in this case, McDonald’s Big Mac.

Most of us of an age will remember the Big Mac rhyme, “two all beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame-seed bun”. McDonald’s (Maccas in Australia, McDo’s in the Philippines) opened their first Australian restaurant in 1971, the year before I finished high school. For those curious, it was opened in Yagoona, a suburb of Sydney.

The rhyme came out on television and radio advertisements in 1974, when inflation was rampant, petrol prices were rising and Gough Whitlam was Prime Minister of Australia. It was a happy, catchy jingle.

I digress. So no matter where you are in the world,. a McDonald’s Big Mac is made with the same ingredients and the same way. McDonald’s does not just sell burgers. They have one of the best quality systems anywhere and so not only are the ingredients the same, the way they are produced, prepared, the amount of power used used on same machines for cooking, the whole kit and kaboodle, is standard everywhere. This means that a direct currency comparison can be made by using the cost to consumers of the Big Mac.

Comparing USD against PHP – raw data – suggesting the peso in undervalued against the USD (or, the USD is overvalued)

In 1986 the Economist published the Big Mac index. It was based on the theory* of purchasing-power parity, the theory suggesting that in the long-run, exchange rates should settle at a rate that provides parity between any two currencies for the cost of the Big Mac. As the Economist notes:

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies. For those who take their fast food more seriously, we also calculate a gourmet version of the index.

I am not thinking of applying an Angeles cheeseburger index … but then again 🙂

You can check the Economist index at The Economist Big Mac Index.

* “All theory depends on assumptions which are not quite true. That is what makes it theory” … Robert Solow in 1956

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