What the Big Mac Index says about the dollar and the dong


WHEN The Economist introduced its Big Mac Index 35 years ago, McDonald’s ubiquitous burger was only $ 1.60 in America. Now, it costs $ 5.65, based on an average price across four cities. The increase far exceeds inflation over the same period.

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Indeed, the Big Mac’s birthplace is one of the most expensive places to buy it, according to our comparison of over 70 countries around the world (see graph). In Vietnam, for example, the burger costs 69,000 dong. Although it sounds huge, you can get a lot of dong for your dollar and therefore a lot for your money in Vietnam. You can buy 69,000 dong for just $ 3 on the forex market. And so a Big Mac in Vietnam turns out to be 47% cheaper than in America.

Good to know. But the index was not intended as a buying guide for burgers, but as a tongue-in-cheek guide to currencies. In principle, the value of a currency should reflect its power to buy things, according to the doctrine of “purchasing power parity”, a term coined by Gustav Cassel, a Swedish economist, in 1918. Since 69,000 dong and $ 5.65 is the same value to be able to buy a burger, they should be worth the same amount. The fact that you can buy a burger’s value in dong for 47% less than a burger’s value in dollars suggests that the dong is undervalued.

The US Treasury certainly thinks so. Twice a year, he reports to Congress on which countries could keep their currencies artificially cheap to boost exports and steal a competitive advantage. In April, he confirmed that Vietnam was one of a trio of trading partners, alongside Switzerland and Taiwan, pursuing “potentially unfair” monetary practices, based on three tests of its design. (Vietnam has a “large” trade surplus with America, a “material” external surplus with the world, and its central bank buys a lot of dollars and other foreign currencies.) In recent months, the US Treasury has harassed Vietnam to mend its ways, a process known as “enhanced engagement.”

On July 19, the two sides reached an agreement. Vietnam’s central bank has vowed not to engage in competitive devaluation. He also said he would gradually let the currency fluctuate more freely and be more open about his interventions in the forex markets. Hopefully, this will avoid damaging tariffs or any similar improvement in the engagement of the two countries.

Lest the Big Mac Index contribute to Vietnam’s woes, it’s worth pointing out that it’s common for poor countries to look cheap compared to rich in a simple price comparison. Vietnam is not an outlier in this regard. The price of a burger is what you would expect given the GDP per person. (Taiwan, another country on the wrong track for the Treasury, is a different case. It remains surprisingly cheap, given its prosperity. And Switzerland seems expensive in every way.)

The cheapest burger we could find is in Lebanon. Although the price of a Big Mac has risen dramatically to 37,000 Lebanese pounds, the currency has collapsed even more dramatically on the black market, where 22,000 pounds buys a dollar.

As a result, the Big Mac only costs the equivalent of $ 1.68. Perhaps one of the reasons the burger has remained so cheap is that Lebanese importers can purchase some of the Big Mac’s ingredients at a more favorable subsidized exchange rate. They can buy wheat for a dollar, for example, 1,500 pounds and other food items, including cheese, priced at 3,900. Lebanon’s currency chaos is both a reflection of its economic disaster and a contributor to it. Even at an artificially low price, a Big Mac is a little consolation. â– 

This article appeared in the Finance & Economics section of the print edition under the title “The Happiest Meal”


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