The Big Mac is McDonald’s poster product, with the key characteristics of two beef patties and three buns. This hamburger has spread to almost every country in the world thanks to globalisation, which allows it to be used in an interesting study in economics.
Although every country’s Big Mac varies in ingredients and nutritional values slightly, they are similar enough to be considered a universal standard. Therefore, the price of a Big Mac in each country can be used to find what is called the Purchasing Power Parity (PPP). The PPP is an index to show how much money in Country A’s currency is required to buy goods that cost $1 of Country B’s currency.
Finding the Big Mac index is quite simple. First, find the prices of Big Macs in two countries. Then, divide the first price by the second price (without converting currencies), and find the ratio. This ratio (i.e. the PPP) is then compared against the actual exchange rate, using percentage. As it is hard to explain in words, here is a mathematical expression of what is said above (using July 2008 figures):
- A Big Mac costs $3.57 in the US and £2.29 in the UK on average
- $3.57/£2.29 = 1.56 (PPP)
- Actual exchange rate: USD$2.00 : GBP£1.00 = 2.00
- (2.00 – 1.56)/1.56 = 0.28 = +28%
- Therefore, the pound is 28% overvalued
The PPP shows that the exchange rate does not show the actual value of a currency compared to another currency. As in, although the official exchange rate is $2.00=£1.00, using the Big Mac index the actual value ratio between the two currencies is $1.56=£1.00.
Even complicated economic concepts can be explained with everyday objects such as hamburgers, or “burgernomics”.
