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What The Big Mac Index Has To Do With The Price Of Eggs

Author: Melissa Wentzel
Date: 2016-10-08
How the Big Mac Index is used as the global yardstick to measure the currency exchange rate according to what a Big Mac costs in each country.
A long, long time ago (back in 1986) somebody got the bright idea to use the price of a burger to determine Purchasing Power Parity (PPP) - as a joke. This obviously happened at The Economist, because… who else would make that joke? Anyway, the idea stuck. Now, that double-beef-patty inspired Big Mac Index is the global yardstick for the real cost of everything.

What Your Burger Says About Life

So, according to Simple English Wikipedia (yes, that’s a thing), Purchasing Power Parity (PPP) is measured by finding the USD value of a “basket of consumer goods” present in each country.
“If that basket costs $100 in the US and $200 in England, then the purchasing power parity exchange rate is 1:2.”
The price of a McDonalds Big Mac, which informs the Big Mac Index, is an informal way of measuring PPP between different currencies. For example, whether one currency is over- or undervalued, compared to the other. If you divide the price of a Big Mac in the US in USD, by the price of a Big Mac in South Africa, in ZAR, you get the Big Mac PPP exchange rate. Stay with us now... We then compare that value with the actual exchange rate. If it's higher, the first currency is over-valued, and if it's lower the USD is under-valued.

For Example:

In South Africa, a Big Mac costs about R30. In the US, a Big Mac is $4.79 (as per the latest Big Mac Index data). The implied PPP is R6.26 to $1. (R30/$4.79 = 6.26) This actual exchange rate is R13.70 to $1 (at the time of writing this). (13.70-6.26)/6.26 = 1.19 (119 percent) The dollar, therefore, is overvalued against the rand by 119 percent. And now, you can explain that to someone at the braai.  
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How Long Your Domestic Needs To Work For a Big Mac

In 2013, the International Business Times created an infographic currently making the rounds on Reddit, about how long a minimum wage worker would have to work to be able to buy a Big Mac. They displayed data for 20 countries including Australia, China, the US, and Afghanistan. See this below: minimum-wage-minutes-big-mac-01_0

Link to original article including infographic here:

In South Africa, a minimum wage domestic worker earning R18.01 an hour would need to work 100 minutes to enjoy a Big Mac. That's nearly two hours. This tells us that not only is our minimum wage ridiculously low, but so is our purchasing power parity. In Australia, you can earn a Big Mac – on minimum wage – in less than 20 minutes. You'd have to work for 35 minutes in the US, 23 minutes in the UK, but 372 minutes in Afghanistan.

Variants and Limitations

Even if you're not into economics and exchange rate theories, this Big Mac Index is pretty interesting when you look at it like this. But there are limitations. Due to nutritional values and other variants, the Big Mac differs slightly from country to country. In India, for example, they don't have any beef patties. The Chicken Maharaja Mac is the Big Mac of Hindu country. The Economist has had fun with this theme over the years, as you do. In 2004, they did a Tall Latte Index with a Starbucks Latte. Others have jumped onto the currency exchange rate bandwagon too. Bloomberg L.P. did an index based on the price of an Ikea 'Billy' bookshelf. In 2014, Yahoo did a Toyota Corolla Global Price Index, and let's just say you never want to buy a car in Singapore. car-insurance-comparison While America is now also looking at the burrito to inform PPP, one thing we can take away from this is: buy your domestic a Big Mac once in a while. She deserves it.

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