The Big Mac Index
The Economist updates their index, which shows the price of a Big Mac in different countries and the GDP per person.
- 5 august 2011
The Big Mac index from The Economist is a light-hearted way to examine the global economy. Comparing the price of a Big Mac in countries around the world and adjusting for GDP per person, the guide can tell us how different currencies are valued against the dollar. It also shows the places where Big Macs are expensive to purchase, with Brazil, Argentina and Sweden at the top of the list.
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 a basket of goods and services around the world. At market exchange rates, a burger is 44% cheaper in China than in America. In other words, the raw Big Mac index suggests that the yuan is 44% undervalued against the dollar. But we have long warned that cheap burgers in China do not prove that the yuan is massively undervalued. Average prices should be lower in poor countries than in rich ones because labour costs are lower. The chart above shows a strong positive relationship between the dollar price of a Big Mac and GDP per person.