By Sajid Shah

BIG MAC INDEX OR BMI was started in 1986 by THE ECONOMIST. It was aimed to gauge the undervaluation or overvaluation of currencies with respect to the US dollar or the dynamic currency as it is often cited. The Index though was cited as an halfhearted attempt or tongue in cheek stuff at the of its introduction to the world but in the recent time one finds it very crucial as everyone zeroes in on the possibility of arbitrage to find the perfect triad to perform. All the popularity gained is applause worthy but one should be critical of it as it has some serious flaws or limitations. The theory underlying the base of the index is the parity theory which states that in the long run the price of a commodity will be equal in terms of a single currency.

Method to find BMI: Calculate the price of BIG MAC in U.S. Dollar then find the price of the BIG MAC, which even some countries did not even hear of, in that country X. Now convert the price of country’s x big mac in us dollars at current exchange rate and then finally divide the price of big mac in U.S. by the price of BIG MAC in X.And if the ratio calculated is >1 the currency is overvalued and if it  is <1 then the currency is undervalued.

PRICE of Big Mac is 2.4 $ in country X and 3.6$ in country Y .then 3.6/2.4 gives 1.2 that is currency of country x is 50% overvalued than dollar.

But what is important to look at is the question that, does big mac exist in all nations? Does it clearly explain its distribution of each and every cost incurred while making just a “burger”? And is it under the eyes of government due to its publicity?

The Big Mac (and virtually all sandwiches) vary from country to country with differing nutritional values, weights and even nominal size differences.

Not all Big Mac burgers offered by the chain are exclusively beef. In India — which is a predominantly HINDU country — beef burgers are not available at any McDonald’s outlets. The chicken Maharaja Mac serves as a substitute for the Big Mac.

There is a lot of variance with the exclusively Beef “Big Mac”: the Australian version of the Big Mac has 22% less energy than the Canadian version, and is 8% lighter than the version sold in Mexico

The index does not also explain its spreading of costs of electricity, water, rents. As the number of big mac being sold at different outlets is different thus any revenue multiplier strategy would have been flawed.

The index has also suffered some manipulations in the past. Critics of the presidency of Cristina Fernández de Kirchner in Argentina and many economists believe that the government has for years falsified consumer price data to understate the country’s true inflation rate. The Economist stated in January 2011 that Big Mac index “does support claims that Argentina’s government is cooking the books. The gap between its average annual rate of burger inflation (19%) and its official rate (10%) is far bigger than in any other country.” That year the press began reporting on unusual behavior by the more than 200 Argentinean McDonald’s restaurants. They no longer prominently advertised Big Macs for sale and the sandwich, both individually and as part of value meals, was being sold for an unusually low price compared to other items. Guillermo Moreno, Secretary of Commerce in the Kirchner government, reportedly forced McDonald’s to sell the Big Mac at an artificially low price to manipulate the country’s performance on the Big Mac index. In June 2012 the price of the Big Mac value meal suddenly rose by 26%, closer to that of other meals, after The EconomistThe New York Times, and other media reported on the unusual pricing. A Buenos Aires newspaper stated Moreno loses the battle.

Thus although the index makes everything a bit more digestible but one should not follow it every time as it is also not foolproof and moreover has been subjected to manipulations in the past. Burgernomics just lets you feel the difference in the burger’s taste profoundly.

Posted by The Indian Economist | For the Curious Mind