Posts Tagged ‘Maconomics’

Global Big Maconomics

February 11, 2014

Norway is a lot more expensive than Sweden. This is not lost on McDonald’s advertising agency DDB in Stockholm and they have installed this billboard straddling the border to persuade Norwegians to cross over for their burgers. Many Norwegians cross the border in any case to shop and most road borders have retail outlets and supermarkets on the Swedish side to cash in on this. Food alcohol and, it seems, Big Macs offer significant savings.

Norway - Sweden Big Mac

Norway – Sweden Big Mac

Eighty nine Norwegian kronor is about 93 Swedish kronor and so the Big Mac meal (including a drink and fries) is about 30% cheaper in Sweden. McDonalds have not revealed how effective this has been in attracting Norwegians.

TheLocalNorway once again boasts the world’s most expensive Big Mac, the UK’s Economist magazine has reported, with the ubiquitous double-decker burger now costing 48 kroner, or $7.80. 

Venezuela slips into second place with a $7.15 burger. Switzerland, which briefly stole the top spot last year on the back of a burgeoning Swiss franc, is now in third place with its $7.14 burger, followed by Sweden ($6.29) in fourth. 
The burger in Norway is on average 68.8 percent more expensive than it would be in a McDonald’s in the US. 

The cheapest Big Mac in the world is in India at $1.54. China at $2.74 and Japan at $2.97 are surprisingly close. Of course the current currency exchange rates also have an impact.

The Economist invented the global Big Mac Index in 1986. The 2014 Big Mac index was released a few days ago with January 2014 exchange rates.

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in January 2014 was $4.62; in China it was only $2.74 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 41% at that time. 
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 at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index.

This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today’s equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.

Click here for the interactive map.

big mac index - the economist

big mac index – the economist

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