Big Mac Holds Insight on Currency Values

What can a Big Mac tell us about the price of tea in China? A lot, it turns out. For 24 years, The Economist magazine has measured the value of global currencies using those two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun.


China, for example, where you can buy almost two Big Macs for the price of one in America, has the world’s most undervalued currency, the magazine said.


The Big Mac Index was designed to explain an economic concept called purchasing power parity, the concept that a dollar should buy the same amount from country to country. If there is parity, the price of a commodity — in this case a Big Mac — should be equal across the globe.


This year’s index found that Big Mac prices, adjusted to dollars, ranged from $6.87 in Norway to $1.83 in China. The average price in the United States is $3.58.


While the Big Mac Index is a novel way to look at what a dollar buys from one country to the next, it also has proved strikingly accurate at foreshadowing changes in currency, University of Florida Professor Dave Denslow said. “If the Big Mac Index says that a currency is undervalued, it tends to appreciate.”


That is exactly what happened with the Chinese currency, though pressure from the US and European governments probably weighed more heavily of the minds of Chinese officials than the word of a British business publication.


Last month, just days before the Group of 20 Summit, China announced that it would revalue the yuan.


US labor unions and the workers they represent could benefit from the move because American factories struggle to compete with the low cost of labor and supplies in China.


But more Americans may feel a tug on their wallets. So much of what we buy is imported from China, and a more expensive yuan will drive up prices.


McDonald’s global reach has made its signature sandwich the perfect, playful commodity, said Rick Wade, who owns and operates 10 franchises in northern Palm Beach County in Florida.


The Big Mac is sold in more than 100 countries, in more than 80 percent of the world’s 32,000 McDonald’s restaurants.


Franchises in a few countries reject the product for cultural or religious reasons.


But where it is sold, the mega-corporation closely controls the quality of the product, making it easy to compare the price of a Big Mac in Florida with Bahrain, Wade said.


When Wade orders hamburger patties, he chooses from maybe three suppliers, he said. And he cannot just mix the sandwich’s distinctive tangy sauce in his kitchens.


He has to order from an approved distributor to make sure the burger he is selling stays true to the original.


“That’s the reason that McDonald’s is the brand that it is, that it is such a powerful global brand,” Wade said.


Often, overseas franchises order from US suppliers. That need to sell a uniform product almost broke the three McDonald’s franchises in Iceland, when the isolated, arctic country’s currency took a dive last year.


Owner Magnus Ogmundsson said at the time that he was bound by his license with McDonald’s to import virtually all of the burger’s components from Germany.


Because the Icelandic currency, the krona, had lost so much of its value, Ogmundsson would have had to charge the equivalent of $6.36 per burger, making it among the world’s most expensive Big Macs.


Instead Ogmundsson closed his three stores and said he planned to open another burger franchise that did not require such costly imports.


But the Chinese people and visiting tourists may see little change in the price of a Big Mac for a while. Since The Economist updated its index in March, the yuan has appreciated about 1 percent.


And that is probably good news — and not just for those who love a good, greasy burger.


The Chinese own a lot of American debt. Undervalued Chinese currency keeps US interest rates lower and allows our government to borrow money instead of raising taxes, Denslow said.


Appreciating Chinese currency is “something we want to see tomorrow instead of today.”


In the meantime, the airplane fare might kill you, but China is your best bet for a cheap burger.


 

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