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Beefing with the Big Mac Index

McDonald’s signature burger offers economic lessons — but not about purchasing power parity

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Daniel Davies

Published5 hours ago

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One of the greatest bits of economics popularisation is the Economist’s “ Big Mac Index”, which celebrates its 40th anniversary this year.

It’s presented as a way to teach people about purchasing power parity: the idea is that McDonald’s Big Mac burger is a homogeneous good, exactly the same the whole world over. Therefore, the theory goes, it should cost the same everywhere — so if you convert the price of a Big Mac sold outside the US into US dollars at market rates, and the outcome is different from the price of a Big Mac in the US, that indicates whether the foreign currency is over- or undervalued.

Which would be great, except that’s not true.

The Big Mac is not the same everywhere in the world. As a good globalist corporation, McDonalds (and its global licensees) makes all sorts of adjustments in local markets, affecting things like salt content, calories and weight. Beef in the abstract is a globally traded commodity, but the beef which McDonalds’ hamburgers are made out of isn’t – walk into a British Isles branch and you’ll see quite prominent advertising that in the UK and Ireland, they exclusively use British and Irish beef.

Even in terms of the big macronutrients, there is a lot of variation — a bit of internet research allowed us to put together this table:

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How much difference does this make? Surprisingly, not a lot.

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If you were using this index to actually trade forex, you might consider that some of the overvaluation of the Euro can be explained by the relatively high protein content of Le Big Mac at McDo’s. You’d also want to be aware of the “kashrut anomaly” which makes the Israeli shekel look crazily overvalued when assessed in terms of cents per calorie. But it’s only in Mexico and Spain that the signal flips from buy to sell or vice versa depending on how you measure the value of a Big Mac. Most of the time, differences in the product don’t seem to matter that much. It certainly seems better behaved than the small caged mammal price data.

The issue is that the Big Mac Index shouldn’t really be seen as an example of Purchasing Power Parity at all. It’s a completely different model of the forex – something closer to the Real Effective Exchange Rate. And that is precisely because the Big Mac isn’t a globally traded good. Restaurant meals are much more like services than goods – we can measure the calories, protein, salt and all, but in terms of costs, the most important ingredient in a Big Mac is probably semi-skilled labour.

The Big Mac index is mostly an index of labour costs relative to the USA, which is why it usually kind-of-sort-of works as a tool for thinking about exchange rates. And to the extent that it isn’t an index of labour costs (for example, the very material seeming undervaluation of South Korean won and Japanese yen), it’s probably got something to say about another big ingredient; city centre commercial rent.

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