What is the Big Mac Index?

There are different ways to measure global inflation and an easy, practical and Western way to do it is based on the price of Big Macs, which becomes a common reference for making these assessments in the international economy and making an approximation on the standard of living in each country. The iconic hamburger, invented in 1957 by one of the first franchisees of the Pennsylvania company that gained a great presence in a multitude of markets, covering 70 countries around the world with different prices depending on where it is located, generated the appointment of said index.

The Big Mac index was created by the prestigious publication The Economist in 1986 as part of a cheerful guide to find out if the value of currencies was at its correct level. (EAE Business School, 2022) Although it is based on the theory of purchasing power parity (PPP), where in the long term, exchange rates should move towards the rate that equalizes the prices of an identical basket of goods and services in two different countries, that is, the practical value of this index, allows establishing a related reading of the quality of life of different destinations where the relationship of the exchange rate of different currencies vs. the dollar referenced to the cost of a Big Mac is analyzed .

In the same way, it starts as a simplified indicator of the purchasing power of a country, associated with one of the premises of this index, which is that a person can acquire the same amount of goods in different destinations for the same currency, through of the calculation comparing the prices of a Big Mac hamburger in a large number of nations. (The Economist, 2021) The comparison takes as a reference some strong currencies such as the dollar, the euro, the pound sterling, the Japanese yen and the Chinese yuan, since when comparing the wealth between different countries with different currencies, it is necessary to homogenize the information based on a common unit of account for all countries.

This makes it possible to check if these currencies are overvalued or undervalued and at the time of doing so, the price of the Big Mac hamburger (McDonald's main product) divided by the price of the same hamburger in another country (own currency) is used. The value obtained is compared with the exchange rate between these two currencies, if it is lower than the exchange rate, then the first currency is undervalued with respect to the theory of purchasing power, while, on the contrary, if it is higher, it will be overvalued. . (DELSOL Software, 2022)

A practical case would be to compare the price (indicated in the image) of the Big Mac from the USA, with a value of 5.81 dollars, with the price of a Big Mac from the Eurozone, the price is 4.95 euros, when dividing the figures the result is 1.17. So, it can be interpreted that the dollar is devalued with respect to the euro. Given this, the main purpose of this particular index is to evaluate the difference, in relative terms, of appreciation or devaluation, allowing, in a simple way, to establish whether it is "expensive" or "cheap" to live in a certain country. (Jimenez, 2018) The reference currency in the currency comparison between two different countries is the United States dollar according to this index. This currency conversion makes it possible to establish a relationship between the value of money in two territories. (EAE Business School, 2022)

Beyond the curiosity and prestige that this index has internationally, it is necessary to specify that it is not a scientific study, but it can be seen as a laudable theory and despite the fact that several economists look at this index to measure more or less efficient the purchasing power of the different countries and currencies, this has its limitations that put a stop to this parity. (DELSOL Software, 2022)

And it is that, the presence of this hamburger in different places does not conclude that the level of interest in its consumption is exactly the same in all points. For example, McDonald's is not present in all the countries of the world, in the African continent it only has a presence in countries like Morocco, Egypt and South Africa, which is why the use of the KFC index has been suggested for the African continent, instead of a Big Mac hamburger. Also, McDonald's outlets are not as frequented as in the US or Europe, in India it is relatively expensive to eat at McDonald's compared to eating elsewhere, therefore demand is not very high and only a few people consume it, mostly tourists and foreign residents. (DELSOL Software, 2022)

While in Latin America, McDonald's carries out most of its operations under the company Arcos Dorados Holdings, whose headquarters are in Montevideo, Uruguay. The largest Latin American market for this brand is Brazil, where McDonald's has a network of around 1,000 stores. However, the most devalued currency in Colombia, according to the Big Mac index, presented by various consequences ranging from the increase in inflation, the loss of purchasing power of employees. As a consequence of the increase in inflation, all people who receive a fixed income in local currency see their purchasing power diminished, savings in local currency disappear, and real wages lost.