What Is Burgernomics?
Burgernomics, popularized by the Economist‘s Big Mac Index, is the idea of using the iconic fast-food Big Mac to illustrate purchasing power parity (PPP). Using the cost of a McDonald’s Big Mac as the price benchmark can show how to compare the buying power of different currencies. While initially quite tongue-in-cheek, it’s still around for its ability to show the over- or undervaluation of specific currencies compared with the U.S. dollar.
Key Takeaways
- Burgernomics is a term coined by The Economist in 1986. It uses the price of a McDonald’s Big Mac burger as an informal way to measure the purchasing power parity (PPP) between currencies.
- The Big Mac Index is based on the theory of PPP, which suggests that exchange rates should adjust over time so that the price of the same basket of goods or services (in this case, a Big Mac) costs the same in any two countries.
- The index is calculated by dividing the price of a Big Mac in one country (in its currency) by the cost of a Big Mac in another country (in its currency). This value is then compared with the exchange rate between the two currencies to determine if a currency is under- or overvalued.
- While the Big Mac Index is lighthearted and simplified, it can provide a quick and easily understandable snapshot of the relative value of currencies.
Breaking Down Burgernomics
The Economist says it meant the Big Mac Index to be “a lighthearted guide to whether currencies are at their ‘correct’ level.” Regarding PPP, foreign exchange rates should adjust to equalize the price of goods and services across different nations. According to the magazine, the Big Mac PPP denotes the exchange rate at which the famous McDonald’s hamburger would cost if it were the same in the U.S. as in other countries.
Some countries require some creative approaches to the Big Mac, with its “two all-beef patties, special sauce, lettuce, cheese,” etc. As economists Michael Pakko and Patricia Pollard explain, in India, where McDonald’s does not sell beef, consumers buy the “Maharaja Mac,” made with chicken patties. So India “is not included in the Big Mac survey.” They also note that in Islamic countries and Israel, the Big Mac is made with halal and kosher beef, respectively, though the addition of cheese makes it non-kosher. “Although it is possible to purchase a Big Mac in a kosher McDonald’s, the lack of cheese would exclude it from the survey.”
Burgernomics Example
The Big Mac Index offers a quick way to gauge the value of two currencies and whether the market is over- or undervaluing a currency.
For example, in December 2023, a Big Mac cost $5.69 in the U.S. and DKr39 in Denmark. The exchange rate at the time was 6.85 DKr to USD. Because $5.69 converted to DKr39 at the time, the currencies were fairly valued against each other.
By contrast, the cost of a Big Mac in Switzerland was SFr7.10. This implies an exchange rate of 1.25 USD to SFR, but the actual exchange rate was 0.87 USD to SFR, meaning that the Swiss franc was significantly overvalued compared with the dollar.
Burgernomics Today
In the U.S., Big Mac sales have waned since the 1980s as tastes change and consumers seek other healthier options. Nevertheless, the index has remained a benchmark.
A 1997 article in the Journal of International Money and Finance noted that the Big Mac makes sense as an international monetary standard, given that it’s produced locally in more than 111 countries worldwide, with only slight variations in the recipe. For that reason, it’s almost “the perfect universal commodity.”
That said, The Economist has adjusted its approach to Burgernomics. In August 2023, the magazine noted that the Big Mac Index “was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible.”
Still, their experts there have now calculated “a gourmet version of the index,” which addresses a criticism that average burger prices could be expected to be cheaper in countries with lower labor costs.
“PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today’s equilibrium rate,” according to The Economist. “The relationship between prices and GDP [gross domestic product] per person may be a better guide to the current fair value of a currency.” “The adjusted index uses the ‘line of best fit’ between Big Mac prices and GDP per person for 48 countries (plus the euro area).” The magazine said it “gives a supersized measure of currency under- and over-valuation.”
Is The Big Mac Index Useful?
Yes, the Big Mac Index can be helpful in a few ways. The Economist says it wasn’t intended to be used “as a precise gauge of currency misalignment” but to help people understand exchange-rate theory. The index is suitable for teaching about exchange rates, has become popular among economists, and has been used in several academic studies.
What is Purchasing Power Parity?
The Big Mac Index illustrates the idea of PPP, which compares the price of a basket of goods to compare economies and standards of living. The Big Mac Index looks at just one good, a Big Mac, while other measures of PPP use a wider basket of goods, including food, clothes, energy, entertainment, and more.
Why Are Currency Exchange Values Important?
Exchange rates are important because they impact global trade and economics. For example, a nation with a weak currency will find that imports are more expensive but that there will be more demand for its exports, which are now cheaper for those in other countries. A nation with a strong currency will pay less for imports but faces the problem of its exports costing more in foreign markets.
The Bottom Line
The Big Mac Index was designed to give everyday people and investors a simpler, fun way to compare the values of currencies using the price of a product everyone understands: a cheeseburger. The index is still used among economists, political commentators, and others for the amusing way it breaks down a complex economic idea to explain how currencies relate to one another and whether one is over or under-valued in relation to the other.
