magazine released their annual "Big Mac Index" for 2007. It's their
lighthearted look at a subject that most people find dry and tasteless. I'm talking
about purchasing-power parity or PPP, not the Big Macs (which may or may not be
tasteless and dry).
They look at world currencies and how fairly valued
they are compared to the currency of other countries. The theory of purchasing-power
parity (PPP) states that a box of goods should cost similar amounts in different
countries because of exchange rates.
So the Economist magazine has McDonald-ized
PPP by using a single Big Mac to measure the value of currencies around the world.
The annual hamburger event that started back in 1986 by the Economist has been
labeled "burgernomics" by some. It is meant to be humorous, but there
can also be a lot of truth in humor.
The humble Big Mac hamburger can be
purchased in about 120 countries throughout the world, so it is a product that
is widely available. In an ideal world there would be more than one product used
to measure the value of a whole country, but that wouldn't be as interesting as
using hamburgers and most people probably wouldn't bother reading past the title
of the study. So the Big Mac Index is really just a bit of fun.
differences and countries at different stages of development are just two factors
that make the Big Mac Index less than an ideal measure.
In 2007 the price
of a Big Mac in the United States of America is $3.22. The most expensive Big
Macs around the world include Iceland (509 kronur or $7.44), Norway (41.5 knoner
or $6.63), and Switzerland which charges $5.05 for the hamburger.
to the Big Mac Index, the Scandinavian currencies mentioned above are all overvalued.
Iceland is 131% overvalued, Norway is 106% overvalued, and Switzerland is 57%
The cheaper currencies that are undervalued include China (11.0
Yuan or $1.41), Malaysia (5.50 Ringgit or $1.57), and Hong Kong is selling Big
Macs for $1.54.
This means that the value of the Chinese Yuan is 56% undervalued
when compared to the price of a hamburger in the USA. That's good news for Chinese
businesses exporting goods to the United States, but it has also created an ongoing
debate between the political leaders of both countries.
It can be like
comparing apples with oranges though as a Big Mac in China is made with cheaper
labor and rent paid for a store in China will also be less than the rent paid
in the United States. Which means that the Big Mac Index and PPP works best with
countries that are at similar stages of development.
The Big Mac Index
below was compiled by the Economist.
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