Big Mac index
Encyclopedia
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
as an informal way of measuring the purchasing power parity
Purchasing power parity
In economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...
(PPP) between two currencies
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
and provides a test of the extent to which market exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
s result in goods costing the same in different countries. It "seeks to make exchange-rate theory a bit more digestible".
The index takes its name from the Big Mac
Big Mac
The Big Mac is a hamburger sold by McDonald's, an international fast food restaurant chain. It is one of the company's signature products...
, a hamburger
Hamburger
A hamburger is a sandwich consisting of a cooked patty of ground meat usually placed inside a sliced bread roll...
sold at McDonald's
McDonald's
McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 64 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by the eponymous Richard and Maurice McDonald; in 1948...
restaurants.
Overview
The Big Mac index was introduced in The EconomistThe Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
in September 1986 by Pam Woodall as a semi-humorous illustration and has been published by that paper annually since then. The index also gave rise to the word burgernomics.
UBS Wealth Management Research has expanded the idea of the Big Mac index to include the amount of time that an average worker in a given country must work to earn enough to buy a Big Mac.
The working-time based Big Mac index might give a more realistic view of the purchasing power of the average worker, as it takes into account more factors, such as local wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
s.
One suggested method of predicting exchange rate movements is that the rate between two currencies should naturally adjust so that a sample basket of goods
Basket (finance)
A basket is an economic term for a group of several securities created for the purpose of simultaneous buying or selling. Baskets are frequently used for program trading.Certain specific products can be seen as specialized "baskets"....
and services should cost the same in both currencies (PPP)
Purchasing power parity
In economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...
. In the Big Mac index, the basket in question is a single Big Mac
Big Mac
The Big Mac is a hamburger sold by McDonald's, an international fast food restaurant chain. It is one of the company's signature products...
burger as sold by the McDonald's
McDonald's
McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 64 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by the eponymous Richard and Maurice McDonald; in 1948...
fast food restaurant chain. The Big Mac was chosen because it is available to a common specification in many countries around the world as local McDonald's franchisees
Franchising
Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a verb....
at least in theory have significant responsibility for negotiating input prices. For these reasons, the index enables a comparison between many countries' currencies.
The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.
For example, using figures in July 2008:
- the price of a Big Mac was $3.57 in the United StatesUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
(Varies by store) - the price of a Big Mac was £2.29 in the United Kingdom (Britain) (Varies by region)
- the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56
- this compares with an actual exchange rate of $2.00 to £1 at the time
- [(2.00-1.56)/1.56]*100= +28%
- the pound was thus overvalued against the dollar by 28%
The Eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
is mixed, as prices differ widely in the EU area. As of April 2009, the Big Mac is trading in Germany at , which translates into , which would imply that the Euro is slightly trading above the PPP, with the difference being 10.9%.
Variants
The Economist sometimes produces variants on the theme. For example in January 2004, it showed a Tall Latte index with the Big Mac replaced by a cup of StarbucksStarbucks
Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 17,009 stores in 55 countries, including over 11,000 in the United States, over 1,000 in Canada, over 700 in the United Kingdom, and...
coffee
Coffee
Coffee is a brewed beverage with a dark,init brooo acidic flavor prepared from the roasted seeds of the coffee plant, colloquially called coffee beans. The beans are found in coffee cherries, which grow on trees cultivated in over 70 countries, primarily in equatorial Latin America, Southeast Asia,...
.
In 2007, an Australian bank's subsidiary, Commonwealth Securities, adapted the idea behind the Big Mac index to create an "iPod
IPod
iPod is a line of portable media players created and marketed by Apple Inc. The product line-up currently consists of the hard drive-based iPod Classic, the touchscreen iPod Touch, the compact iPod Nano, and the ultra-compact iPod Shuffle...
index." The bank's theory is that since the iPod is manufactured at a single place, the value of iPods should be more consistent globally. However, this theory can be criticised for ignoring shipping costs, which will vary depending on how far the product is delivered from its "single place" of manufacture in China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
.
Bloomberg L.P.
Bloomberg L.P.
Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...
introduced the Billy index where they convert local prices of Ikea
IKEA
IKEA is a privately held, international home products company that designs and sells ready-to-assemble furniture such as beds and desks, appliances and home accessories. The company is the world's largest furniture retailer...
's Billy bookshelf into US dollars and compare the prices.
Limitations
The burger methodology has limitations in its estimates of the PPP. In many countries, eating at international fast-food chain restaurants such as McDonald'sMcDonald's
McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 64 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by the eponymous Richard and Maurice McDonald; in 1948...
is relatively expensive in comparison to eating at a local restaurant, and the demand for Big Macs is not as large in countries like India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
as in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. Social status of eating at fast food restaurants like McDonald's in a local market, what proportion of sales might be to expatriates, local taxes, levels of competition, and import duties on selected items may not be representative of the country's economy as a whole.
In addition, there is no theoretical reason why non-tradable goods and services such as property costs should be equal in different countries: this is the theoretical reason for PPPs being different from market exchange rates over time. The relative cost of high-margin
Profit margin
Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.Net profit Margin = x100...
products, such as essential pharmaceutical products, or cellular telephony might compare local capacity and willingness to pay
Willingness to pay
In economics, the willingness to pay is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good or to avoid something undesired, such as pollution...
, as much as relative currency values.
Nevertheless, economists widely cite the Big Mac index as a reasonable real-world measurement of purchasing power parity.
McDonald's is also using different commercial strategies which can result in huge differences for a product. Overall, the price of a Big Mac will be a reflection of its local production and delivery cost, the cost of advertising (considerable in some areas), and most importantly what the local market will bear - quite different from country to country, and not all a reflection of relative currency values. In some markets, a high-volume and low-margin approach makes most sense to maximize profit, while in others a higher margin will generate more profit. Thus the relative prices reflect more than currency values. For example, a hamburger sandwich costs only in France, and in Belgium, but overall, McDonald's restaurants are cheaper in Belgium.
Also prices of Big Macs can also vary greatly from different areas of a country; a Big Mac in New York City will be more expensive than a Big Mac in a suburb an hour away.
Comparison issues
The Big Mac (and virtually all sandwiches) vary from country to country with differing nutritional values, weights and even nominal size differences.Not all Big Mac burgers offered by the chain are exclusively beef. In India — which is a predominantly Hindu
Hindu
Hindu refers to an identity associated with the philosophical, religious and cultural systems that are indigenous to the Indian subcontinent. As used in the Constitution of India, the word "Hindu" is also attributed to all persons professing any Indian religion...
country — beef burgers are not available at any McDonald's outlets. The chicken Maharaja Mac serves as a substitute for the Big Mac.
There is a lot of variance with the exclusively Beef "Big Mac": the Australian version of the Big Mac has 22% fewer calories than the Canadian version, and is 8% lighter than the version sold in Mexico.
In October 2009, it was reported that all three of the McDonald's in Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
would be closing primarily due to the chain's high cost of importing most of the chain's meat and vegetables from the Eurozone. At the time, a Big Mac in Iceland cost 650 krona ($5.29), and the 20% price increase that would have been needed to stay in business would have increased that cost to 780 krona ($6.36).
iPhone application
The Big Mac Index iPhone application shows figures from 2010.Figures
Five most expensive (22 July 2010) (not considering the fact that the buyer's equivalent minimum wage, and therefore purchasing power, is different)- NorwayNorwayNorway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
- $7.20 (45 kr.Norwegian kroneThe krone is the currency of Norway and its dependent territories. The plural form is kroner . It is subdivided into 100 øre. The ISO 4217 code is NOK, although the common local abbreviation is kr. The name translates into English as "crown"...
) - SwedenSwedenSweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
- $6.56 (48 Kr.Swedish kronaThe krona has been the currency of Sweden since 1873. Both the ISO code "SEK" and currency sign "kr" are in common use; the former precedes or follows the value, the latter usually follows it, but especially in the past, it sometimes preceded the value...
) - SwitzerlandSwitzerlandSwitzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
- $6.19 (6.50 CHFSwiss francThe franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there...
) - BrazilBrazilBrazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
- $5.77 (9.50 R$) - DenmarkDenmarkDenmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
- $4.90 (28.5 Kr.Danish kroneThe krone is the official currency of the Kingdom of Denmark consisting of Denmark, the Faroe Islands and Greenland. It is subdivided into 100 øre...
)
Five most affordable (22 July 2010) (not considering the fact that the buyer's equivalent minimum wage, and therefore purchasing power, is different)
- CroatiaCroatiaCroatia , officially the Republic of Croatia , is a unitary democratic parliamentary republic in Europe at the crossroads of the Mitteleuropa, the Balkans, and the Mediterranean. Its capital and largest city is Zagreb. The country is divided into 20 counties and the city of Zagreb. Croatia covers ...
- $1.50 - UkraineUkraineUkraine is a country in Eastern Europe. It has an area of 603,628 km², making it the second largest contiguous country on the European continent, after Russia...
- $1.84 - Hong KongHong KongHong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
- $1.90 - China, People's Republic of - $1.95
- Malaysia - $2.27
Ten fastest earned (July 2009)
TokyoTokyo, ; officially , is one of the 47 prefectures of Japan. Tokyo is the capital of Japan, the center of the Greater Tokyo Area, and the largest metropolitan area of Japan. It is the seat of the Japanese government and the Imperial Palace, and the home of the Japanese Imperial Family...
- 10 minutes
Los AngelesLos ÁngelesLos Ángeles is the capital of the province of Biobío, in the commune of the same name, in Region VIII , in the center-south of Chile. It is located between the Laja and Biobío rivers. The population is 123,445 inhabitants...
- 11 minutes- ChicagoChicagoChicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...
- 12 minutes - Miami - 12 minutes
- New York CityNew York CityNew York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
- 13 minutes 
AucklandAucklandThe Auckland metropolitan area , in the North Island of New Zealand, is the largest and most populous urban area in the country with residents, percent of the country's population. Auckland also has the largest Polynesian population of any city in the world...
- 14 minutes
SydneySydneySydney is the most populous city in Australia and the state capital of New South Wales. Sydney is located on Australia's south-east coast of the Tasman Sea. As of June 2010, the greater metropolitan area had an approximate population of 4.6 million people...
- 14 minutes
TorontoTorontoToronto is the provincial capital of Ontario and the largest city in Canada. It is located in Southern Ontario on the northwestern shore of Lake Ontario. A relatively modern city, Toronto's history dates back to the late-18th century, when its land was first purchased by the British monarchy from...
- 14 minutes
ZürichZürichZurich is the largest city in Switzerland and the capital of the canton of Zurich. It is located in central Switzerland at the northwestern tip of Lake Zurich...
- 15 minutes
Dublin - 15 minutes
Ten slowest earned (July 2009)
- NairobiNairobiNairobi is the capital and largest city of Kenya. The city and its surrounding area also forms the Nairobi County. The name "Nairobi" comes from the Maasai phrase Enkare Nyirobi, which translates to "the place of cool waters". However, it is popularly known as the "Green City in the Sun" and is...
, Kenya - 158 minutes - JakartaJakartaJakarta is the capital and largest city of Indonesia. Officially known as the Special Capital Territory of Jakarta, it is located on the northwest coast of Java, has an area of , and a population of 9,580,000. Jakarta is the country's economic, cultural and political centre...
, Indonesia - 136 minutes - Mexico CityMexico CityMexico City is the Federal District , capital of Mexico and seat of the federal powers of the Mexican Union. It is a federal entity within Mexico which is not part of any one of the 31 Mexican states but belongs to the federation as a whole...
, Mexico - 129 minutes - CaracasCaracasCaracas , officially Santiago de León de Caracas, is the capital and largest city of Venezuela; natives or residents are known as Caraquenians in English . It is located in the northern part of the country, following the contours of the narrow Caracas Valley on the Venezuelan coastal mountain range...
, Venezuela - 126 minutes - ManilaManilaManila is the capital of the Philippines. It is one of the sixteen cities forming Metro Manila.Manila is located on the eastern shores of Manila Bay and is bordered by Navotas and Caloocan to the north, Quezon City to the northeast, San Juan and Mandaluyong to the east, Makati on the southeast,...
, Philippines - 88 minutes - CairoCairoCairo , is the capital of Egypt and the largest city in the Arab world and Africa, and the 16th largest metropolitan area in the world. Nicknamed "The City of a Thousand Minarets" for its preponderance of Islamic architecture, Cairo has long been a centre of the region's political and cultural life...
, Egypt - 82 minutes - Santiago de Chile, Chile - 69 minutes
- BratislavaBratislavaBratislava is the capital of Slovakia and, with a population of about 431,000, also the country's largest city. Bratislava is in southwestern Slovakia on both banks of the Danube River. Bordering Austria and Hungary, it is the only national capital that borders two independent countries.Bratislava...
, Slovakia - 62 minutes - MumbaiMumbaiMumbai , formerly known as Bombay in English, is the capital of the Indian state of Maharashtra. It is the most populous city in India, and the fourth most populous city in the world, with a total metropolitan area population of approximately 20.5 million...
, India - 61 minutes - BudapestBudapestBudapest is the capital of Hungary. As the largest city of Hungary, it is the country's principal political, cultural, commercial, industrial, and transportation centre. In 2011, Budapest had 1,733,685 inhabitants, down from its 1989 peak of 2,113,645 due to suburbanization. The Budapest Commuter...
, Hungary - 59 minutes
See also
- Golden Arches Theory of Conflict Prevention
- Christmas Price IndexChristmas Price IndexThe Christmas Price Index is a tongue-in-cheek economic indicator, maintained by the U.S. bank PNC Financial Services, which tracks the cost of the items in the carol "The Twelve Days of Christmas."-Origins:...
- Recession indexRecession indexThe recession index is an informal index created by The Economist which counts how many stories in the Washington Post and the New York Times using the word “recession” in a quarter....
- List of unusual units of measurement
- List of humorous units of measurement
External links
- The Big Mac Index index page — contains Big Mac Index data dating back to 1997 (Economist.com subscription required for detail)
- The Hamburger Standard - BigMac Index Table
- Big Mac versus iTunes Aplia
- Global Investor Article on Big Mac Index - Discusses origins & significance to international investors - 9 February 2007
- "Prices and Earnings: A Comparison of Purchasing Power Around the Globe -2009," UBS AG, Wealth Management Research Good report on purchasing power containing a Big Mac index (in minutes) as well as for staples such as bread and rice for 71 world cities.
- Text versions of the Big Mac index for research
- UBS Prices and Earnings Report 2006: Dublin is 8th most expensive city but 3rd highest for net earnings Very thorough article on the time-based Big Mac index.
- The Big Mac Index Converter — Currency conversion calculator that uses the Big Mac Index.