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Burgernomics: Fast Food as Economic Indicator
Business Publication Uses Big Mac to Explain Exchange Rate
 Listen to John Ydstie's interview with Pam Woodall.
April 26, 2002 -- How does the esteemed business publication The Economist deduce that the dollar is more overvalued now than at any time in the past 16 years?
Burgernomics.
The 700,000-circulation weekly, based in London, says that it "seeks to make exchange-rate theory more digestible" by maintaining what it calls the Big Mac Index. That index uses the price of a Big Mac hamburger, a fast-food staple available in about 120 countries, to measure and compare purchasing power around the globe.
On All Things Considered, guest host John Ydstie talks to Pam Woodall, author of the Big Mac Index, which The Economist wryly describes as "arguably the world's most accurate financial indicator to be based on a fast-food item."
The Economist wryly describes its Big Mac index as "arguably the world's most accurate financial indicator to be based on a fast-food item."
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As the publication's Web site Economist.com explains it, "Burgernomics is based on the theory of purchasing-power parity (PPP), the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. Our 'basket' is a McDonald's Big Mac... (and) the Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued."
For instance, the Big Mac index shows that an Argentine Big Mac costs a mere 78 cents, compared to a Swiss Big Mac at $3.81. Comparing these price differences with exchange rates, The Economist derives that Argentina's struggling peso is the world's most undervalued currency, while the Swiss franc ranks as the most overvalued.
Editor Woodall acknowledges that The Economist's index is vulnerable to criticism from traditional economists for ignoring price distortions caused by variables such as taxes, profit margins or the cost of non-tradable goods and services.
"If you were to look at this from a purely economic point of view, there are lots of reasons why the Big Mac index is a flawed measure of PPP," says Woodall, noting that in Argentina, the price of a hamburger can be affected by low wages and a plentiful supply of beef.
But Woodall answers bugernomic critics by pointing to the index's greatest triumph to date -- predicting the fall of the euro against the dollar, at a time when traditional economists predicted the euro would rise.
"What is curious is that for all the criticism we get … [the Big Mac index] is actually a good predictor over time," she says, "If more investors believed in our index, they'd be a lot richer today."
Other Resources
• The Economist's Web site provides more information on the Big Mac index and related topics, including an essay on the place of the hamburger in American life, and the corporate alliances of McDonald's.
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