You’re probably wondering what the Big Mac has to do with economics. This humble burger has actually proven to be a useful tool for comparing different countries’ economies around the globe.
This story deals with indices, so to start off, let’s look at what an index is. An index is a way of measuring something about the economy so that we can draw conclusions about things happening in the world. An index gives us the power to simplify the complexities of the world into something that is easy to understand.
Hungry for more?
It turns out that the Big Mac is one of the most consumed items in the world. In fact, McDonald’s operates in more than 120 countries, with 35,000 locations worldwide. This universal consumption provides us with a unique opportunity to compare prices from all over the world, so that we can see where it is relatively more or less expensive. This is what lead to the creation of the Big Mac index.
Currently, South Africa is one of the cheapest places to buy a Big Mac in dollar terms, just beaten by Russia and Malaysia.
The table below shows some of the most expensive Big Macs in dollar terms. A Big Mac in Switzerland would cost you almost 3 times more than in South Africa if you paid in dollars.
This can be taken a step further; it can now be seen how long it takes on average to earn the equivalent of a Big Mac in each country. This is an important insight that tells us how difficult it is to earn an income compared to living costs. Looking at the table below it is relatively easy to earn the equivalent of a Big Mac in Hong Kong, taking only 8.6 minutes of your day, but quite difficult to earn the same in Kenya.
What’s the takeaway?
In a perfect world, a Big Mac would cost the same in every country when converted to the same currency, but this is clearly not the case.
If we do some calculations we can see that the rand is much weaker than it should be against the dollar. In fact, a person from the United States who visits South Africa will find a Big Mac 62% cheaper than what they’re used to back home. This balance shifts constantly, so economically speaking there is a chance that the rand could increase in value in the future.
This method, however, is not foolproof and should be taken with a pinch of salt (and some ketchup). Big Mac burgers vary quite substantially between countries and the cost of production can be very different. This, in turn, makes the one to one comparison dubious, but it still gives us a relatively good indication.
More than burger economics.
Let’s look at what men’s underwear can tell us about the economy. Underwear is an essential item for most men and is something that they will buy consistently throughout the year. However, it was found that when the economy slows down, so too does the demand for men’s undies. Men will be more likely to let their undies go threadbare before buying new ones.
This lets us form a simple index: If sales of men’s underwear go up, then the economy is improving. If sales of men’s underwear go down, then the economy is in a downturn.
Indices like these are a fun and simple way of relating economic concepts back to everyday life, making it much easier for everyone to use.
Fun fact of the day: On average, 22seven users spent R161.92 at McDonald’s per visit in the last year.