Inflation according to the Big Mac index. Source: Wikimedia.org
What is the Big Mac index?
Economists have several ways to measure inflation worldwide, one way is to determine the purchasing power parity in different countries with reference to an identical product present in those countries.
Basically, the index is based on the theory that a person should buy the same amount of goods for the same currency in different countries. And since the iconic hamburger from the McDonald's franchise is a uniform product that has a presence in a multitude of international markets, spanning more than 70 countries with prices adjusted to where it is sold, a simple way to measure the purchasing power of a currency was to take the price of Big Macs as a basis.
Image of a Big Mac hamburger in Japan. Source: Wikimedia.org
Thus, by comparing the price converted into dollars of a Big Mac in the local currency of a given country with the price of a Big Mac in the United States, it is possible to know whether or not the currency of the country being analyzed is overvalued with respect to the dollar. In theory, in a balanced market, the dollar should buy the same amount of hamburgers in all countries.
Then, taking the selling price of this hamburger as a reference value, it is possible to compare the cost of living in the countries where it is sold, establishing whether the local currency of those countries is overvalued or undervalued in relation to the U.S. dollar.
The Big Mac index is calculated simply by taking the price of the hamburger in two different countries, each in its own currency, and dividing them by each other. The value obtained is compared with the current exchange rate of the currency. If the result is lower, then the first currency is devalued; conversely, if the value obtained is higher than the official exchange rate, the first currency compared is overvalued.
And according to the most recent edition of The Economist magazine, in Venezuela the cost of a Big Mac hamburger was 56.3 Bolivars in December 2022, while in the US it was $5.36. Which suggests a parity of 10.5 Bolivars per dollar, but the difference of this rate and the official rate of the country at the time of the study, suggest that the Bolivar was devalued by almost 50% at that time.
Venezuela's minimum wage is hardly enough for a McDonald's combo. Source: Wikimedia.org
And although this index has many detractors due to the limitations of comparing this type of product in two different countries, where factors such as the cost of production and demand influence the price, it helps to understand how people's purchasing power behaves in different parts of the world. For example, the current minimum wage in Venezuela is not enough to buy a combo with fries and soda at this popular hamburger franchise.
Well, for Venezuelans it is not news to know that their local currency has lost purchasing power.
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