Tracker

by Jan 30, 2012 No Comments

The Big Mac Index McDonald’s is planning further expansion after it reported an 11 per cent rise in net income in the last three months of last year to £886m. In a statement, the company said it planned 1,300 new outlets in the coming year, taking the number worldwide to 33,500.

It is planning to create 2,500 jobs in the UK, including 190 at existing outlets in Scotland.

While the implications of this will be fiercely debated, one publication has traditionally used the company’s signature product as an indicator of currency value around the world. The Economist’s Big Mac index is based on the theory of purchasing-power parity: in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. The Economist’s basket holds a McDonald’s Big Mac, whose price around the world it compared with its American average of $4.20.

Using a method that’s simple but has been viewed with scepticism since it was introduced in 1986 by senior economics writer Pam Woodall, The Economist divides the price of the Big Mac in two countries and compares the result to the currencies’ exchange rate.

Critics have complained that the formula fails to consider the production and delivery costs, workers’ wages, demand, regional taxes and other factors that vary across nations.

UBS Wealth Management Research expanded the idea of the Big Mac index to include the amount of time that an average worker in a given country must work to earn enough to buy a Big Mac. The working-time based Big Mac index might give a more realistic view of the purchasing power of the average worker, as it takes into account more factors, such as local wages.

But according to The Economist’s own burgernomics, the Swiss franc is now “a meaty” 62 per cent overvalued. The exchange rate that would equalise the price of a Swiss Big Mac with an American one is SFr1.55 to the dollar; the actual exchange rate is only 0.96.

The cheapest burger is found in India, costing just $1.62. But because Big Macs are not sold in India, The Economist took the price of a Maharaja Mac, which is made with chicken instead of beef. Nonetheless, its index suggested that the rupee is 60 per cent “undercooked”.

The euro, which recently fell to a 16-month low against the dollar, is now trading at less than €1.30 to the greenback. “The last time we served up our index in July 2011, the euro was 21 per cent overvalued against the dollar, but it is now just 6 per cent overvalued,” it said.

At $3.62, a British Big Mac suggests the pound is undervalued, and more so than last year when it weighed in at $3.89. Other European currencies have also weakened against the dollar since our previous index, notably the Hungarian forint and Czech koruna, which have fallen by 23 per cent and 16 per cent respectively. Six months ago both currencies were close to fair value, but they are now undervalued by 37 per cent and 18 per cent.

Will Peakin Will Peakin

Beginning as a reporter on weekly newspapers in the North-East of England, Will moved to Glasgow and worked as a freelance for a number of UK national newspapers. In 1990 he was appointed News Editor of Scotland on Sunday and in 1995, Scotland Editor of The Sunday Times. In 1999, he and his family moved to the south-west of France where he wrote for The Sunday Times Magazine. Returning to Scotland in 2002, he was Assistant Editor (Features) and Deputy Editor at The Scotsman before joining Holyrood Magazine in 2004. He writes for the magazine's business pages and edits its series of...

Leave a Reply