IN THE mall below a McDonald’s restaurant in Hong Kong, excitable children pose for photos next to a statue of the chain’s clownish mascot, Ronald, who lounges on a bench, one yellow glove raised in welcome. He fronts a display of other promotional decor, including a soft drink the size of a man and a box of fries that looms even larger. A video chronicles the chain’s 41 years in Hong Kong, which have been full of menu twists and tweaks: sausage McMuffins, shake-shake fries, chicken McNuggets, salads. At the restaurant upstairs, touchscreen menus now allow choosy customers to build their own burger, adding exotica like grilled champignon, herb aioli and sliced jalapeños or even (heresy!) subtracting the bun.
Innovation and differentiation—the creation of things new and singular—are a boon to economic progress and the bane of economic measurement. It would be much easier to compare economies across borders and time if goods remained much the same, wherever and whenever they were made. Fortunately, amid all the creativity and complexity, the Big Mac remains something of a constant. It varies rather little from country to country or year to year. Its consistency is part of its appeal to customers. It is also why it appeals to us—as a handy benchmark for judging the strength of currencies and even the size of economies.
To calculate our Big Mac index, we collect the price of the burger (with bun, of course) in 59 countries accounting for 94% of the planet’s output. (In India, we substitute the Maharaja Mac, which is made with chicken rather than beef.) It turns out that some of these burgers are much cheaper than others in dollar terms. In America, a Big Mac costs $5.04 on average. In Hong Kong, by comparison, the same burger costs the equivalent of $2.50 or so. There are many potential reasons why Hong Kong’s Big Macs are cheaper than America’s. But one is that Hong Kong’s currency is undervalued.
The Big Mac index thus provides a simple gut-check for judging the competitiveness of currencies. It compares each country’s exchange rate with a hypothetical alternative: the rate that would equalise the price of a Big Mac around the world. In Hong Kong, where the Big Mac costs 19.20 Hong Kong dollars, that hypothetical exchange rate would be 3.81 Hong Kong dollars to the greenback. The real, market exchange rate is much weaker: it takes 7.75 Hong Kong dollars to buy one of the American sort. According to the Big Mac index, then, the Hong Kong dollar is heavily undervalued—by more than half.
Hong Kong is not alone. Judging by the price of burgers, most currencies are undervalued against the dollar. The euro looks 17% too cheap. The yen is undervalued by about 30%. Big Macs also look strikingly cheap in many emerging economies, including South Africa (58%) and Malaysia (61%). In fact, only three currencies look overvalued by this measure: Sweden (overvalued by 4%), Norway (9%) and Switzerland (31%).
If most currencies are “too” cheap against the dollar, it follows that the dollar itself must be too expensive. The Big Mac index suggests it has climbed a whopping 56% above fair value on a trade-weighted basis. Does this mean we should expect a dollar crash? No. There are fundamental economic reasons why exchange rates tend to look cheap in developing countries—in particular, poor productivity in both tradable sectors (eg, manufacturing) and non-tradable ones (eg, services). As productivity in manufacturing improves in emerging markets, factory wages will rise, putting upward pressure on wages and prices elsewhere in the economy, even in fast-food chains. That will make their burgers dearer, narrowing the gap with America.
Track global exchange rates over time with The Economist's Big Mac currency index
In a more sophisticated version of the Big Mac index, we have taken these fundamentals into account. The adjusted index looks at whether a currency is cheap or expensive compared with what you would expect given the country’s level of development. By this measure, the dollar is still overvalued, but by a much smaller margin: roughly 11% on a trade-weighted basis.
The Big Mac index also provides a fun gauge of the size of national economies, a matter of great debate and controversy. If a country spent its entire annual income on Big Macs, how many burgers could it buy? America’s GDP is forecast to be over $18.5 trillion this year, according to the IMF. That translates into almost 3.7 trillion burgers at a little over five bucks apiece. America thus accounts for a big share of the world total, which will amount to over 19.2 trillion in 2016, by our calculations, based on IMF forecasts (see chart).
Can any other economy rival the home of the hamburger? China’s GDP will be a little over 73 trillion yuan this year, says the IMF, or less than $11.4 trillion. But in China, a Big Mac costs only 18.6 yuan. So its GDP is equivalent to over 3.9 trillion burgers, over 5% more than the American total. Indeed, by this measure, China overtook America back in 2013. At market exchange rates, America’s economy is still far bigger than China’s. But at patty-purchasing parity, their positions have been flipped.
This article appeared in the Finance & economics section of the print edition under the headline "Patty-purchasing parity"
