What is Burgernomics
Burgernomics is an economics term made popular by the so-called Big Mac Index published by The Economist. Burgernomics is the idea of the using the iconic fast-food Big Mac to illustrate purchasing power parity (PPP). Using the cost of a McDonald's Big Mac as the price benchmark, a comparison can then expose how various currencies relate to one another with their buying power.
Burgernomics takes its name from the Big Mac Index, first published in 1986, as a tongue-in-cheek example of purchasing power parity (PPP) across national economies. The index is useful for its ability to show over- or undervaluation of specific currencies when compared with the U.S. dollar.
BREAKING DOWN Burgernomics
The Economist says it meant the Big Mac index to be "a light-hearted guide to whether currencies are at their correct levels." When it comes to purchasing power parity (PPP), foreign exchange rates should adjust to equalize the price of goods and services across different nations. According to the magazine, the Big Mac PPP denotes the exchange rate at which McDonalds' famous hamburger would cost the same in the United States as it would in other countries across the world.
Some countries require some creative approaches to the Big Mac, with its "two all-beef patties, special sauce, lettuce, cheese," etc. As economists Michael Pakko and Patricia Pollard explain, in India, where McDonald’s does not sell beef, consumers purchase the "Maharaja Mac," which is made with chicken patties instead, so India, "is not included in the Big Mac survey." They also note that in Islamic countries and in Israel, the Big Mac, made with halal and kosher beef, respectively, but the addition of cheese makes it non-kosher. "Although it is possible to purchase a Big Mac in a kosher McDonald’s, the lack of cheese would exclude it from the survey."
Big Mac Index
In the U.S., Big Mac sales have been falling since the 1980s, as tastes change and consumers seek other healthier options, but still, the framework has staying power as a useful benchmark tool.
As was explained 20 years ago in the Journal of International Money and Finance, the Big Mac makes sense as an international monetary standard, given that it's produced locally in more than 80 countries worldwide, with only small variations in the recipe. In many ways, it's close to "the perfect universal commodity."
That said, the Economist has made some adjustments to its approach to Burgernomics more recently. Earlier this year, the magazine noted that the Big Mac Index "was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible."
Still, the experts there have now calculated "a gourmet version of the index," which addresses a criticism that average burger prices could be expected to be cheaper in poorer nations than in wealthier countries since labor costs tend to be lower.
"PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today's equilibrium rate," according to The Economist. "The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the 'line of best fit' between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation."