McDonald’s is everywhere. Around the world, there are more than 36000 locations in 119 different countries. One of the defining characteristics of McDonald’s is its commitment to consistency across the brand. While there are regional differences to their menus such as kiwi burger in New Zealand or Chicken Kanji in Indonesia, the core menu items such as the Big Mac and fries are always available. This means that the same items are being made in the same way, using the same ingredients in very different economies around the world. Now it is pretty obvious that Big Macs don’t cost the same everywhere. A Big Mac costs an average $4.79 in the US so if you were to charge the equivalent in Kenya, it would be KSP 480 – which would mean nobody would buy it because that’s like double of their average daily salary. It would be like charging $200 for a Big Mac in the US. That’s why McDonald’s senses the local price of burgers based on a variety of factors such as labour costs, rent, ingredient costs and local income levels.
The Big Mac Index is published in 1986 by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries.
The index, created in 1986, takes its name from the Big Mac, a hamburger sold at McDonald’s restaurants. The index also gave rise to the word burgernomics. According to The Economist, the Big Mac index “is a tool to make exchange-rate theory more digestible.”
Let’s try to understand this. We know that purchasing power is the amount of goods you can buy for one unit of currency. Suppose in the US, the average price of a Big Mac is $4.79 and that in Sweden is 44 kronor, which is equivalent to $5.13. This means that in the US, you can get 20.8% of a Big Mac for a dollar while in Sweden, you can only get 19.5% of that burger. So in terms of the Big Mac, the purchasing power of the US dollar is higher.
Another interesting conclusion that can be drawn from this is that the Swedish Kronor is overvalued in terms of exchange rates by about 6.1%. We can also look at how long it takes individuals to buy a Big Mac in different cities around the world. In Nairobi Kenya, an average worker would have to work 173 minutes on the clock to pay for one Big Mac. Compare that to a worker in Hong Kong, who would only have to work for 8.7 minutes for the same burger.
Now, of course, the index isn’t perfect. While the cost of ingredients is fairly similar across all countries since they follow the same standards, the index does not account for the wide differences in labour and land costs. A burger will cost less to make in India because you comparatively don’t have to pay that much to employees and for retail space. Nevertheless, the Index is a great way of understanding econ, a rather tasty one too.