Big Macs and Emerging Markets

The Economist’s Big Mac Index looks at the dollar cost of a hamburger sold by McDonald’s restaurants in some 60 countries. The index shows a remarkable range of prices around the world. In the latest survey, the most expensive burger was found in Switzerland ($6.80) and the cheapest could be bought in Ukraine ($1.60). Presumably, these hamburgers are identical, with the same combination of bread, beef patty, lettuce and sauce in every unit. The price in each country should reflect the cost of the materials, labor and rent, as well as profit margins and taxes. The index pretends to shed some light on the relative costs of doing business in different countries, and, given that it has been measured for some 30 years, it can also provide an indication of the evolution of business costs. Moreover, it can be used as a proxy to  measure the relative competitiveness of currencies around the world.

The results of the January 2018 survey are shown below.

A Few observations:

  • No surprise to see Switzerland and Scandinavian countries at the top, where they have been for a long time. This makes sense, given high labor costs and value added taxes in these highly productive economies.
  • The high ranking of the United States is relatively new. The U.S. had ranked in the third and fourth decile, until 2016. This is the consequence of U.S. dollar strength, and a very surprising 4.1% annual increase in prices, more than twice U.S. inflation.
  • Brazil is back in the top decile, and it secures its place as the most expensive burger in emerging markets. Brazil is a complete anomaly, the only EM country in the top 20, and this in spite of being an extremely competitive producer of beef and other agricultural product. The high ranking is caused by the chronic overvaluation of the real, excessive business regulations and very high taxes. It will be interesting to see whether the recent labor reform can result in lower costs and if a significant fall in interest rates over the past year will lead to a weaker currency.
  • Turkey has fallen to the bottom decile for the first time in over a decade, the result of a weak economy and currency devaluation.
  • The traditional export-focused countries all maintain competitive currencies and cheap burgers. Of the Asian countries, only South Korea appears in the top half. In Latin America, Mexico remains very competitive.

The charts below show Big Mac prices relative to the U.S. price over the past twenty years, by region.

Asia is characterized by consistently stable and low prices. Chin has seen the most appreciation, caused by the appreciation of the yuan.

Latin America is characterized by unstable prices, with episodes of high overvaluation. Mexico is the exception, maintaining a more stable and competitive peso which is essential for its export-driven economy.

In Europe and Africa, Turkey behaves more like a Latin American market. After several decades of abusing with current account deficits, Turkey has had to devalue the lira to regain competitiveness. Russia, on the other hand, has managed its currency relatively well in spite of the volatility of oil prices.

For comparative purposes, the table below shows the REER (Real effective exchange rate), since 1995.

  • High volatility in Brazil and Turkey.
  • Gradually appreciating currencies China and Indonesia.

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