Economics: Big Mac Attack
Apr. 25th, 2003 12:48 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
holzman_tweedI've heard tonight about the coolest economic measure: The Big Mac Index, or BMI. It's amazing that I worked in the financal industry for five years and never heard of this.
You see, MacDonalds has spent much effort on uniformity of product, and the Big Mac is their flagship sandwich. This means that, no matter where you go in the world, a Big Mac is a Big Mac is a Big Mac and tastes the same, the price just varies from place to place. Some economists theorize that a Big Mac should have uniform value (which isn't quite true -- a nation of vegetarians would likely have less use for it than a nation of beef lovers.), and so they compare the cost of a big mac to the exchange rate.
Suppose the average price of a Big Mac in the US is $3.50. Now take a hypothetical currency, the Elbonian Quatloo, and find out how many Quatloos get you a Big Mac. If it's Q3.5, and the exchange rate is such that Q3.5 = $3.5, the BMI is 1.
Suppose the exchange rate is Q7 = $3.5. That gives you a BMI of .5, which implies that the price of the Quatloo is overpriced against the Dollar, based on its purchasing power.
Even though the model has flaws, that is just so cool!
You see, MacDonalds has spent much effort on uniformity of product, and the Big Mac is their flagship sandwich. This means that, no matter where you go in the world, a Big Mac is a Big Mac is a Big Mac and tastes the same, the price just varies from place to place. Some economists theorize that a Big Mac should have uniform value (which isn't quite true -- a nation of vegetarians would likely have less use for it than a nation of beef lovers.), and so they compare the cost of a big mac to the exchange rate.
Suppose the average price of a Big Mac in the US is $3.50. Now take a hypothetical currency, the Elbonian Quatloo, and find out how many Quatloos get you a Big Mac. If it's Q3.5, and the exchange rate is such that Q3.5 = $3.5, the BMI is 1.
Suppose the exchange rate is Q7 = $3.5. That gives you a BMI of .5, which implies that the price of the Quatloo is overpriced against the Dollar, based on its purchasing power.
Even though the model has flaws, that is just so cool!
