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DID you know that there is a simple index that can measure a country’s economic level?
Not to be confused with food, the Big Mac Index is a survey conducted by The Economist in 1986 that examined the relative over or undervaluation of currencies based on the relative price of a common standard Big Mac hamburger sold by McDonald's restaurants all over the world.
Thus, The Economist introduced a simple indicator of the fundamental value of currencies globally.
McDonald's is the world's leading global food service retailer with over 38,000 locations in over 100 countries. Approximately 93% Of McDonald's restaurants worldwide are owned and operated by independent local business owners.
By using a Big Mac to compare the price of a famous same product (Big Mac) across countries around the world, we can predict a country’s currency value.
This simple comparison of prices does not only compare the price of a Big Mac, but also the purchasing-power-parity (PPP).
On the basis of this theory, it can be said that a Big Mac that costs more reflect a higher currency value of that country.
The PPP theory follows the idea that in the long run, exchange rates move towards rates that will match the goods and services of any two countries.
The founder of the PPP theory then produced what is referred to as Burgernomics, or the economics based on the price of hamburgers sold in more than 100 countries.
When a country has lower hamburger prices compared with the price of a hamburger in the country of origin (the United States), then the currency of the country would relatively face a drop in value against the US dollar.
A Big Mac costs £3.69(US$4.44) in Britain and US$5.15 in the United States. The implied exchange rate is 0.72. The difference between this and the actual exchange rate, 0.83, suggests the British pound is 13.8% undervalued. (Economist)
So, which countries have the cheapest and most expensive Big Mac?
On average, the prices differ. In Switzerland, it is sold at (US$ 6.71), Norway(US6.26), Sweden (US$5.59), Malaysia (US$2.45) and among the lowest are Indonesia (US$2.34) and Venezuela (US$1.76). (Statista)
The Big Mac Index is useful for a number of reasons. Investors can use it to measure inflation over time, and compare this to official records. The Big Mac Index has become a global standard and it is included in a number of economic textbooks, and has at least 20 academic studies revolving the index.
Though not perfect, the Big Mac Index has also been adopted by international financial practitioners to obtain a ballpark or closest figure of the current value of a currency. Factors such as high-interest rates and stability of a nation contribute to a strong currency.
However, the Big Mac Index is applicable only as a guide, as there are other factors that need to be taken into consideration in determining what makes a country’s currency value stronger or weaker when compared with the greenback.
As a conclusion, the Swiss franc is the most stable, valued and expensive currency, in the world. At (US$6.20), Switzerland has the most expensive Big Macs in the world, according to the July 2022 Big Mac Index. Concurrently the cost of a Big Mac in Malaysia was (US$2.45) and (US$3.39) in Thailand.
But so much for the rakyat still grouse about our cost of living in Malaysia, nevertheless as a caring government the rakyat expect more effort and initiative taken to improve the situation.
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