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The Big Mac Index

\nThe Economist just published its report on global Big Mac prices. What is it supposed to teach us?

In the complex world of exchange rates, one index speaks to those of us who aren't economists: burger prices. Last week, The Economist, the British newsweekly and advocate of global free-market, social progressivism, published its semi-annual Big Mac Index.The index is intended to show consumer purchasing power parity, a measure in theoretical economics based on the so-called "law of one price." The idea is that once different currencies (pesos, pounds, rubles, etc.) are converted to a common standard (the U.S. dollar), the price of a single product (the McDonald's Big Mac) should sell for the same price in each different country.Because the entire burger–540 calories of two all-beef patties, lettuce, cheese, pickles, onions, and special sauce on a sesame seed bun–is comprised of tradable goods and non-tradable services, it should theoretically cost the same everywhere because it has the same ingredients worldwide. As one correspondent told NPR last year, "A Big Mac in America is the pretty much the same as a Big Mac everywhere else."But it does not, in fact, cost the same everywhere. For example, this year, an American visitor to Turkey or the Czech Republic will find familiar prices for Big Macs, but the same traveler going to China, Sri Lanka, or Ukraine would spend less. In other words, where a Big Mac is cheaper, the U.S. dollar appears to be worth more. What the simple, tongue-in-cheek index depicts is how international markets are either "undervalued" or "overvalued," a useful insight for currency traders and travelers alike.The index may also reflect something serious: the effects of agricultural policies and social safety nets. Countries with "overvalued" currencies (such as Denmark and Sweden) tend to offer more in social services than the United States' and tend to subsidize farmers' incomes. Paying more for a burger and its associated services, in effect, draws the curtain back on how cheap goods can be an illusion. An inexpensive burger comes with higher social costs. As Ellen Ruppel Shell recently wrote in Cheap, "Discounts don't compensate for the staggering and rising costs of essentials-housing, education and health care."It's also interesting to note that in countries where the Big Mac's value is comparable to that in the United States (such as Australia, Britain, Canada, and Mexico) are places with greater concentrations of McDonald's. They're also countries with relatively high obesity rates. Still, it would be a stretch to conclude that widely available, cheap products alone causes obesity. As The New Yorker's Elizabeth Kolbert points out, the obesity epidemic may have something to do with "elasticity of appetite," a cultural and biological inability to resist consuming what's in front of us, something that McDonald's, in super-sizing its menu, has used to its advantage. Another factor the index does not account for is various cultural attitudes towards food. In China, for example, the Big Mac represents a niche product priced well above staples that is symbolic of modernity and Americana.While the Big Mac Index might be imperfect it's a useful tool in determining currency exchanges. And it also points to the power of food as an economic indicator. The Economist has also used Coca-Cola to show a loose correlation between Coke consumption and wealth, quality of life, and political freedom. On Marginal Revolution, Tyler Cowen suggested that sashimi may be a sign of consumer confidence. Slate's Daniel Gross reported slowing steak sales in light of the recession. Now, if The Economist wants to maintain its reputation as the purveyor of solutions for the global elite, they should show a little more support for local foods and develop an index showcasing the value countries place on artisinal, regional specialties-rather than offering up a supersized portion of publicity for Mickey D's.

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