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Big Mac Index 2007

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Big Mac Index 2007
Big Mac Index 2007
Review of the price of Big Macs around the world, put out by the Economist magazine to make exchange rate theory more digestible.

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Big Mac Index 2007 Big Mac Index Review 2007

The Economist 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.

Cultural 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.

According 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% overvalued.

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.

Big Mac Index from the Economist magazine



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