As well as its status as a McDonald’s institution, the price of a Big Mac can give us a lot more insight into the world’s currencies than we give it credit for.
The “lighthearted” index from The Economist determines what the correct buying power for currency should be based off the price of a McDonald’s Big Mac in each of the 120 countries in which it can be purchased.
Based on the theory of purchasing power parity, or PPP, the index works on the notion that in the long run, exchange rates should move towards a rate that would see the prices of identical goods and services equalise across any two countries.
With the price of a Big Mac siting at $6.45 in Australia, The Economist is able to compare this with every other country’s pricing for the same two-patty, lettuce, special sauce and bun combo.
According to the most recent Burgernomics research, the Australian dollar is overvalued in the UK, Japan and Europe, and so it would reasonably follow on that your travel dollars would go further in those countries.
In Britain, the Big Mac costs £3.39 – implying an exchange rate of 1.90. This is only just above the actual exchange rate of 1.89, suggesting the Australian dollar is barely overvalued – at 0.9 per cent.
It’s a similar story for wider Europe, where a Big Mac can be consumed for €4.12, implying an exchange rate of 1.57. This is close to the actual exchange rate of 1.61, and shows the Aussie dollar is 2.9 per cent undervalued in the economic region.
Across in Japan, the same burger will set you back ¥390.
With an implied exchange rate for ¥100 being 1.65, this is a fair way off the actual exchange rate of 1.32 and overvalues the Australian dollar by 25.6 per cent.
In contrast, the Australian dollar is 21.5 per cent undervalued compared to the United States, where the iconic burger costs US$5.67.
The implied exchange rate based on burger prices is 1.14 – which is far lower than the actual exchange rate of 1.45.
The analysis also revealed the Australian dollar won’t stretch so far in China, where a Big Mac costs 21.50 yuan.
Implying an exchange rate of 0.30, it stands in stark contrast with the actual exchange rate of 0.21 – and points to the potential overvaluation of the Australian dollar by 42.5 per cent.
How does the analysis work?
- Purchasing power parity (PPP) implies exchange rates are determined by the value of goods that each currency can buy.
- Differences in local prices of the Big Mac can suggest what an appropriate exchange rate should be.
- Burgernomics then estimates how much a currency is undervalued or overvalued relative to another. This is done by comparing the exchange rate as calculated through the burger, and how each country’s currency is actually faring in the real world.
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