The Big mac index. What’s it?

2.10.2022
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индекс бигмак - ELI

Official economic structures and statistical agencies regularly publish the main economic indicators – the consumer basket, purchasing power, and price index. But at the same time, there are other economic indicators, thanks to which experts try to explain rather complex things through accessible concepts. The most famous of them is the Big mac index.

Big Mac index, what are the features?

A very unusual way to compare currencies and find out the exchange rate against the US dollar, the most famous and popular of unofficial indicators around the world is called the big mac index.

Why this name? Because everyone knows it, you can buy it anywhere in the world, and it contains the most popular and simple food products. The concept was coined in 1986 by British journalists.

To understand the essence of this term, first of all, you should study “purchasing power” — an indicator of how many products or essential goods can be purchased for a specific amount of money. If last year less money was spent on a specific set of products than this year, the purchasing power of the currency decreased, which means that inflation occurred.

Purchasing power parity is a comparison of the cost of the same product in different countries. For example, in the Russian Federation, a banana costs 15 rubles, and in America you will have to pay $ 1 for it. Accordingly, 15 rubles cost 1 dollar. Thus, the exchange rate is $ 0.15 per ruble. Since according to this theory, the value of bananas in all states is the same.

As a result, according to the theory of purchasing power, identical products should have the same value in different cities and states, and the exchange rate of the currency should correspond to how much you will have to pay for this product.

Big Mac’s rating is not high, as the index has not been considered serious since its inception. It does not take into account many factors, such as customer demand, the number of imported and local products in each store, competition in the market, the specifics and strategy of the retail network, etc. For example, in countries where they don’t eat pork, they put chicken in a big mac. This point is not taken into account when calculating the indicator. In addition, unexpected jumps in the value of the domestic currency are possible in the state, which has a significant impact on price formation.

What is the big Mac index useful for in our life?

the big mac index is

According to experts, there is no practical benefit from it. In this case, you can compare currencies using a burger and understand which of them is overvalued and which, on the contrary, is undervalued. If, for example, today we measure the world in big macs, then the ruble is undervalued by more than 70%, that is, within the framework of this parity, the dollar is equivalent to 30 rubles. This approach doesn’t work in real life. For example, this year in Russia for 1000 rubles you can buy about five burgers, and in America it will be enough only for two or two and a half, and in other countries even less.

The appearance of new data on the big Mac index in Ukraine and other countries once again confirms that this indicator does not accurately reflect the prices of goods and services offered in different cities, making it impossible to accurately predict currency fluctuations.

Financial experts call the big mac index by country an excellent joke on the economy, repeated every 6 months, constantly giving rise to disputes and discussions.

Possible alternatives

To date, there are more accurate comparisons of pricing in different countries. One of them is the relative cost of a basket of essential services and products from the World Bank. If we take into account this purchasing power parity, then the Russian economy is on the 6th place in the world.

This method clearly proves that it is more profitable to live here than, for example, in America. However, this is without comparing the quality of products. This option also has disadvantages. In addition to the fact that the quality of services and goods differs from city to city, there are questions about whether we can use some services if we want, for example, medicine in India or education in the Czech Republic. Most people cannot travel abroad to take advantage of non-tradable services, so the cost should not be similar around the world.

Can Big mac predict the exchange rate?

mcdonald's index

If the value of a big mac shows an overvaluation or undervaluation of currencies, then can the McDonald’s index predict the exchange rate? The results of numerous calculations have shown that this is not justified. The indicator helps to predict price changes in different countries to some extent. Most likely, the cost of products in the near future in the CIS will increase more than in America.

The Bigmag index does not predict the movement of currencies and does not provide a high-quality comparison of the relative value of currencies or prices for goods and services. The World Bank indicator provides more up-to-date information.

The Economist staff doesn’t take many factors into account in their research. For example, prices in the nearest McDonald’s may be affected not only by the inflated or undervalued exchange rate of national currencies, but also by other nuances:

  • the level of income of the population and the purchasing power of residents of a particular country;
  • the real cost of labor, transportation services, advertising, etc.;
  • tax system;
  • the cost of similar products from competitors and much more.

Criticism of the burger course

Judging the real welfare of the state and evaluating the exchange rate in this way even sounds strange to many. Many factors now oppose this:

  • the comparison is mainly carried out in America, whose economy is in the first place in the world, respectively, their salaries are higher and goods are more expensive;
  • the price of a burger is determined by the demand for it. For example, if a locality has a lot of food outlets from KFS, Burger King, etc., you can not expect that McDonald’s will be popular;
  • each country has its own food cult and attitude to it. In the US, fast food is preferred, while in the Russian Federation, most of the population will now prefer rolls or Italian pasta to burgers;
  • the index does not take into account tax costs. In one country, the tax may be 30%, and in another 10%. This, of course, will have a significant impact on the price of the big mac. For example, the value-added tax in Russia is 20%, but in the United States it is zero;
  • you can find a huge number of more correct and relevant parameters, but in any case, there will be nuances and subtleties everywhere that must be taken into account when calculating.

Thus, we can conclude that the Big Mac index is a successful economic joke that attracts the attention of readers around the world. Approximately every six months, The Economist staff updates its values. And journalists from different countries get the opportunity to publish regular articles with flashy headlines. And readers have an additional chance to discuss, criticize or praise economic policy.

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