The world can be measured by the cost of a Big Mac

Yahoo Finance
July 25, 2014

It’s a term recognized around most parts of the world: The Big Mac. In more than 116 countries and with over 34,000 locations around the globe, McDonald’s (MCD) products are as common worldwide as they are in America. The Economist takes it one step further, using the iconic burger as a measure of global inflation.

Yahoo! Finance’s Jeff Macke says The Economist's Big Mac Index measures “your buying power. It's a cute way of looking into what you can buy with a dollar…you can’t really feel that buying power until you go overseas.”

The concept for the index is simple: it measures the price of a Big Mac around the globle (except in India where the Big Mac is not offered; India's Maharaja Mac, a chicken sandwich, was substituted). It tests the economic theory of purchasing power parity -- that the same item should be priced the same around the world, as long as exchange rates equalize.

The beefy data reveals exchange rates and inflation are not normalized across international territories and the U.S. dollar has not been sharply devalued, as many predicted when the Fed began its quantitative easing program.

In the United States, a Big Mac is priced at $4.80. But in the Ukraine, the price of a Big Mac can cost as low as $1.63. In Norway customers pay $7.76. The price of a Big Mac in China is 43% lower than in the U.S. 

What does this tell us? First, Norway's kroner is inflated in value versus the dollar by 65%. Second, Ukraine's hryynia is the most undervalued currency (in relationship to the ones used in the index).

Macke says his takeaway from the index is that the worse case scenario from the Fed’s quantitative easing moves hasn't materialized. He says that the prevailing notion that “the Fed is ruining our buying power...doesn’t seem to be the case.”

That’s what the lighthearted burger measure shows, in essence. Historically high levels of asset purchases and low-interest rate policies aimed at weakening the dollar has had little effect. That’s largely because other central banks have done the exact same thing.

So the next time you find yourself in Johannesburg or Mumbai, there’s no need to feel guilty for that meal at the local McDonald’s. When you order that Maharaja Mac, you know it will be a delicious meal and a tremendous value.

Shibani Joshi is the creator of www.ShibaniOnTech.com and can be followed on Twitter @shibanijoshi.

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