Burgernomics
The Economist has published its bi-annual update of one of our favorite pieces of data analysis: the Big Mac Index. Apart from telling you how much a McDonalds burger will cost on your winter vacation, it’s also a lighthearted test of the economic theory of purchasing power parity (PPP) — the idea that exchange rates should settle at a place where identical goods and services cost the same in every country.
Theory vs. reality
The theory, of course, struggles to hold up in the messy real world. The $5.36 that a Big Mac costs in the US makes the American burger one of the most expensive globally. That's partly because only some of the input costs of a Big Mac are easily tradable across borders; meat, buns and cheese might travel fairly well, but property and labor — as just 2 examples — can get lost in economic translation.
Obviously, this is a rudimentary means of testing the theory, using only the Big Mac’s ingredients as the “basket of goods” rather than the hundreds used in more comprehensive PPP studies. Nevertheless, since The Economist created it in 1986, the index has become an easy measure of a currency's “real” value, providing content for Intro to Econ 101 classes globally.
If you’re an FX trader who believes in the theory of PPP, the index gives you plenty of ideas to work with. If you’re a burger trader, your move is obvious — a Big Mac sold at one of the 100+ Egyptian McDonald’s restaurants goes for less than $2 USD. Although Big Macs are perishable (maybe debatable), if you pack as many into your suitcase as you can and hop on the next 5hr flight to Geneva, where the same burger goes for more than $7, you might just come out ahead.
