The Economist founded the Big Mac Index more than a decade ago as a very interesting way to gauge currency valuations. From The Economist:
Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
The Index currently looks like this:
Short Euro, Short Dollars, Long Yuan, Long Yen – Looks dead on to me. God bless the Royale with Cheese…
Update – Reader Andi was nice enough to inform me that the Royale with Cheese is in fact a quarter pounder with cheese. I believe the line from Pulp Fiction that I was grasping for was “Le Big Mac”. But I could be wrong about that one also….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Royale with Cheese is a quater pounder with cheese
Thanks. I guess I’m not up to snuff on my hamburger terminology.
How does this work in relation to the costs in ‘producing’ a sold Big Mac. The costs of the ingredients, wages, benefits, real estate rents, taxes, and profit margins would be different in different countries. So you know if this index adjusts for these factors?
This thing is by no means infallible.
From Wikipedia –
The burger methodology has limitations in its estimates of the PPP. In many countries, eating at international fast-food chain restaurants such as McDonald’s is relatively expensive in comparison to eating at a local restaurant, and the demand for Big Macs is not as large in countries like India as in the United States. Social status of eating at fast food restaurants like McDonald’s, local taxes, levels of competition, and import duties on selected items may not be representative of the country’s economy as a whole. In addition, there is no theoretical reason why non-tradable goods and services such as property costs should be equal in different countries: this is the theoretical reason for PPPs being different from market exchange rates over time. Nevertheless, economists widely cite the Big Mac Index as a real world measurement of purchasing power parity. McDonald’s is also using different commercial which can result in huge differences for a product, whereas there is a smaller price difference between both countries. For example, a Hamburger sandwich costs only 1 € in France, and 1,50 € in Belgium, but in overall, McDonald’s restaurant are cheaper in Belgium. In Estonia, the price difference between a Big Mac burger and the whole meal is sometimes as small as 3 EEK (0,20 USD), or 5% of the price of the burger alone.
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