The Big Mac Index

Did you know the price of a single Big Mac can predict the value of currencies around the world? Read on to find out!

McDonald’s is everywhere, with more than 36000 locations in 190 countries. One of the defining characteristics of McDonald’s is its commitment to consistency. While there are regional differences in the menu such as Nasi Lemak burger in Malaysia or Kiwi burger in New Zealand, the core menu items such as Big Mac, chicken nuggets, and fries are always available. That means the same items are made in the same way with the same ingredients in economic disparity across the world. Having said that, Big Macs do not cost the same everywhere. A Big Mac costs an average of US$4.79 in the U.S and charging an equivalent of that in Malaysia would be RM20. This amount is expensive to Malaysian consumers for a Big Mac and that is why McDonald’s sets the local price for burgers based on a variety of factors such as labor cost, rent, ingredient costs, and local income levels.

The theory of Purchasing Power Parity (PPP) is based on the amount of goods you can get for one unit of currency. It is a popular metric used by macroeconomic analysis to compare different countries’ currencies through a basket of goods (e.g. Big Macs). PPP allows economists to compare economic productivity and standard of living between countries. PPP is significant beyond GDP. It allows us to see the difference in price level between developed and developing countries. The amount of goods and services that you can buy with US$500 in the US is very different to what you can buy with 500 US dollars in rural India.

As mentioned, in the U.S. the average cost of a Big Mac is $4.79. In Sweden the cost of a Big Mac is 44 krona which is equivalent to $5.13. This means in the U.S., 20.8% of a Big Mac can be purchased for $1 and in Sweden for 19.5% of that burger can be bought. In terms of the Big Mac, the PPP of the U.S. is higher. This also demonstrates the Swidish krona is overvalued in terms of the exchange rate by about 6.1%, according to the Big Mac Index. The Big Mac index was created by the Economist magazine in 1986 as an informal way of comparing PPP between currencies and to make exchange rate theory more digestible. Nevertheless, it has become a global standard and the topic of many academic studies.

In Venezuela the cost of a Big Mac is equivalent to $0.66. This is the cheapest Big Mac in the world in terms of U.S. dollars. With the cost of one Big Mac in the U.S., seven Venezuelan Big Macs can be bought. It is largely due to currency devaluation and increase in inflation. After Venezuela, the cheapest Big Macs are in Russia ($1,53), Ukraine ($1.54), South Africa (1.77), and Malaysia ($1.82). On the other side of the spectrum, the top five most expensive Big Macs around the world can be found in Switzerland ($6.44), Sweden ($5.13), Norway ($5.21), the U.S. ($4.79), and Denmark ($4.23).

Interestingly, in Nairobi, Kenya, an individual needs to work for 173 minutes to buy a Big Mac. In contrast, a worker in Hong Kong needs to work for 8.7 minutes to pay for a Big Mac. However, the index is not accurate as the cost of ingredients might not be similar across all countries since all the ingredients are held on the same standard. The index does not account for the wide differences in labour and land cost. For instance, a burger will cost less to make it in India as the labour cost is low. Nevertheless, the indexes are a great way to teach basic Economics in a tasty way.

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About the Author

Mahmuda Begum Meem

Mahmuda Begum Meem is currently a year 2 student at the University of Nottingham Malaysia majoring in Economics. She loves to read, write, and watch movies during her spare time. She hopes to be a well-known economist one day.