Looking at the Big Mac Index

Last week, The Economist released its updated Big Mac Index which compares how much it costs to buy a Big Mac across the globe. It is, according to the magazine, “lighthearted attempt to gauge how far currencies are from their fair value.”

It is based on the theory of purchasing-power parity (PPP), which argues that in the long run exchange rates should move to equalise the price of an identical basket of goods between two countries. Our basket consists of a single item, a Big Mac hamburger, produced in nearly 120 countries. The fair-value benchmark is the exchange rate that leaves burgers costing the same in America as elsewhere.

The chart below shows how countries rank on the Big Mac Index. You will notice that Asia is the cheapest place to buy a Big Mac while it is more expensive to buy them in Canada, Scandinavia and Europe:

Richard Florida and Charlotta Mellander took the data one step further “Big Mac Index stacks up against key measures of economic prosperity and well-being, running a series of basic correlations and plotting some scatter-graphs of it against key measures of economic and social well-being.”

Florida and Mellander find that the Big Mac Index is associated with economic output and life satisfaction, and is a key indicator of the “transition to modern, post industrial economies.”

It is also “negatively associated with blue-collar economies, being negatively associated with the percentage of the workforce in manufacturing, construction, and other physical labor work.”