The Golden Arches are a global symbol, one, which is recognizable in every corner of the earth. It is a sad commentary of the transition period from communism to free-market democracy that the presence of a McDonalds outlet meant that a country or city was on its way. The first McDonalds in Estonia was placed in an inappropriate location, at the Viru Gate, jarringly ugly and just wrong in that mediaeval architectural setting. The novelty there has worn off - the long lineups common during the initial months of operation are no more. Curiously - or perhaps not so - the world's busiest McDonalds is in Moscow. Perhaps the blatant capitalism, heavy-handed union-busting corporate mentality just appeals to those who know no other way of living, or have obviously not read their Kalle Lasn or Naomi Klein.
Estonia and Russia are just two examples of the global spread of this fast-food culture. The Big Macs are produced to the parent company's "exacting standards" locally in almost 120 countries. Beyond the brand-name spread is also the reality that people must obviously be able to afford fast food in these countries. American tourists alone would not keep these foreign outlets afloat.
But - what of the cost of the food? Lacking a common currency beyond the powerful greenback, the editors of The Economist created the Big Mac Index in 1986. It is a light-hearted attempt at using something immediately familiar to perform a more serious task - making adjustments for differences in prices worldwide.
Purchasing-power parity (PPP) is the economic term used to convert the value of output in different countries into a common currency. As The Economist notes, answers to the question of how fast is the world economy growing need a common PPP definition. It is not just a question of relative wealth, for we know that the average person in America is richer than one in China. The adjustment for differences in prices must be considered. Converting national GDP into dollars at market prices is misleading, for prices tend to be lower in poor economies - or are subsidized. A buck in Beijing is still worth more than buck in Seattle. ( The Economist people also have a Latte Index, triggered by Starbucks' immense popularity that deals with luxury items, but that is grist for another mill.)
The magazine also divides the local currency price by the American price. This is what tourists do - and say, hey Martha, let's load up on the quarterpounders, they are cheaper here. The Economist's intention is a bit more serious. Using Japan as an example, where Big Mac costs YEN262, they divide that with the American price, producing a dollar PPP against the yen of YEN 90. Comparing that with the official exchange rate of YEN113 the editors conclude that the yen is thus 20% undervalued.
Granted, the Big Mac Index is no forecasting tool - the yen is not necessarily a good buy for currency speculators. Big Macs are not traded across borders as PPP theory demands. However, this somewhat whimsical yet seriously researched, well-explained index has merit indeed.
Global economic ranking are dramatically transformed when measured on a PPP basis rather than market exchange rates. While the USA still remains number one, China jumps from seventh to second on the PP conversion. India leapfrogs Germany into fourth. Brazil and Russia leave Canada in the dust. This more accurately reflects the pace of global growth, mirroring the opinion of Milton Friedman discussed in this space recently, that China and India are likely to overtake the EU countries in economic growth soon, if not the USA.
How did this PPP hamburger standard reflect on the Baltic countries? A Big Mac in Estonia and Lithuania is 22% cheaper than in the USA, thus undervalued against the dollar. Latvia is almost at par, just 2% less. The Euro area however, is overvalued by 13%, Britain even more so, there a Big Mac costs 16% more. And in case Canadians are wondering, you should be able to buy a Big Mac here for S2.23 US - suggesting that the Canadian dollar is also undervalued to the tune of -20%. Canadian economists like a weak loonie as a competitive tool, and the big Mac Index gives their theories some credence.
The Economist concludes that all PPP measures are admittedly imperfect. Yet - according to the authors of the article there is general consensus that they give " a more accurate measure of the relative size of economies than market exchange rates - and a better understanding of some of the most dramatic movements in world markets."
Food for Thought indeed. The majority of those of us who shun Big Macs for reasons of principle as well as tastebuds can now gain a better understanding of the complex economic issues in a world dominated by Americans.