The Big Mac Index

The happiest meal

What is it?

This article (The happiest meal) refers to the Big Mac and was published by The Economist. The Big Mac index is an informal measure of purchasing power between countries and was created by the Economist in 1986 as the general population could currency values. The idea is the burger’s price should be roughly the same when compared to the US dollar and would show the differences in the cost of living. However, the articles describe the extreme difference in prices of this burger in several developing countries such as Vietnam where is costs 68000 dong when converted is 47% cheaper compared with the USA.  In principle, the value of a currency should illustrate its ability to buy goods and services which is known as purchasing power parity and that exchange rates should move towards the rate which an identical basket of goods in any country would be worth the same. However, this is not the case. In Vietnam a Big Mac costs 68000 dong and which is $3.00 and $5.65 (price of a Big Mac in the USA) can buy the same good it represents that the dong is severely undervalued.

It is worth mentioning it is common for poorer countries to have an undervalued currency in any comparison of prices as wages are lower and economic growth may be unstable. 

Challenges of the index

This can cause many issues. The American treasury believe many developing countries may purposefully keep their currency artificially low valued compared with the dollar as this sill increase demand for exports and steal more of the global competition. In April of 2021 it was confirmed that Vietnam was in a partnership with Switzerland and Taiwan trying to create unfair currency practices based on tests by the US treasury. This is clearly evident as Vietnam has a large trading surplus with the US, and a material external surplus with the world meaning a significant proportion of their GDP comes from exports in fact just over 50%.

In July the US and Vietnam came to an agreement where the central bank of Vietnam agreed not to be involved with competitive devaluation of their currency and would let it flow more freely. This should mean eventually the cost of a Big Mac in Vietnam will eventually reach an equilibrium with all the other countries in the world and will cost the same everywhere in a free market but this is very unlikely to happen.

Is this a good unit?

This measure is not an official unit for purchasing power as there are several limitations including: it is only one product and cannot account for other goods. Furthermore, the index assumes every country produces and sells identical amounts which is not the case. There are also many other factors not included such as taxes, wages and import duties which can affect prices. To conclude this index is a ’fun’ way to compare countries and may be more understood by the general public however it is not as reliable as other measures and should be compared with other measures such as GDP per Capita.


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