Watch Paul’s conversation with former IMF chief economist Simon Johnson about why the dollar drops when the U.S.
#BIG MAC ALL IN ONE PACK MAC#
In 2004, Paul Solman interviewed The Economist’s Tom Easton about the Big Mac index and purchasing power across countries.Īnd four years later, Solman visited the Not Your Daughter’s Jeans factory in Los Angeles, reporting on how the falling dollar affects imports and exports and inflation. In some markets, a high-volume and low-margin approach makes most sense to maximize profit, while in others a higher margin will generate more profit.īut hey, The Economist treats its index with plenty of levity.
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Overall, the price of a Big Mac will be a reflection of its local production and delivery cost, the cost of advertising (considerable in some areas), and most importantly what the local market will bear - quite different from country to country, and not all a reflection of relative currency values. McDonald’s is also using different commercial strategies which can result in huge differences for a product. The relative cost of high-margin products, such as essential pharmaceutical products, or cellular telephony might compare local capacity and willingness to pay, as much as relative currency values. …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. Wikipedia has a really nice discussion of the Big Mac index’s “limitations,” which includes these paragraphs: (The Economist’s concession that “Political turmoil is depressing the hryvnia” is something of an understatement.) The fact that they’re cheaper in China, say, or far cheaper in the Ukraine, hardly demonstrates that the renminbi or hyrvnia are overvalued. In other words, both land and labor are key cost components. As would the cost of, say, painting the house. If the “identical” spread were in the Boston area - almost anywhere in the Boston area - it would cost many multiples more. The house I’m sitting in while typing this, here in Norwalk, Ohio, sits on three-and-a-half acres of land, boasts a heated swimming pool, and is appraised, accurately, at $148,000. knows, prices for “identical” goods and services vary dramatically by region. “An identical basket of goods and services,” says the Economist. Is Norway’s currency overvalued? Or is Norway just too darned rich? I suspect, in other words, that the Big Mac index is based on a problem in the application of purchasing power parity, as a concept, to a comparison of currency valuation. But having had 10 years to ruminate on the index, while enjoying the Economist’s annual cornucopia of culinary allusions, and looking closely at this year’s Big Mac index graphic, it occurred to me that the most striking correlation seems to link the wealth or poverty of the countries to the price of a Big Mac, not manipulation of exchange rates. Well, a decade later, a Big Mac costs a paltry 3 percent more in the eurozone than in the States - an apparent comedown for the euro. And if you had done this same exercise a couple of years ago, you would have found the reverse: The dollar would have been overvalued compared to the euro. TOM EASTON: For an American, a Big Mac costs about 25 percent more in Europe than it would in New York City. If it costs a lot more or a lot less, that suggests the exchange rate may be out of whack. PAUL SOLMAN: So very roughly, a Big Mac should cost the same everywhere once you adjust for foreign exchange rates. So basically you’ve got a huge swath of products all in one little package that is identical, whether you buy it in Berlin or whether you buy it in Paris or whether you buy it in New York.
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And it has the cheese, which is a dairy product. TOM EASTON: Because it starts with the package, it has the labeling, it has the sesames, it has the bread, it has the beef, it has the lettuce, and it has the pickle, too. Or as the Economist’s Tom Easton explained when I asked him why the Big Mac is a reliable metric in a 2004 NewsHour story: We have long been admirers of the Economist magazine’s Big Mac index, whose annual appearance cleverly reduces the issue of exchange rates to one simple measure: the cost of a Big Mac in various countries around the world.