A Not-So Average Day in Economics: National Burger Day and the Big Mac Index

It’s more than just two all-beef patties, special sauce, lettuce, cheese, pickles, and onions on a sesame seed bun…it’s also an economic index!

Today is one gastronomically amazing day because July 28 is National Burger Day! On this day in 1900, the first hamburgers were said to have been served at Louis’ Lunch Diner in New Haven, Connecticut. While White Castle may be the oldest fast food restaurant, it is still McDonald’s and the sight of those golden arches that hits the spot for most Americans. And their most popular item on the menu is still the Big Mac. But did you know that the Big Mac is also an economic index used across the world?

In 1986, The Economist used the Big Mac as a fun and relatable way to illustrate the economic concept of Purchasing Power Parity (PPP). PPP is mathematically involved and conceptually abstract, but in simple terms, it is an economic measure that compares the purchasing abilities of different world currencies to another. Basically it gives a theoretical exchange rate at which certain goods can be bought with another currency. Conceptually difficult? I agree, and so does The Economist, which is why they created the Big Mac Index (BMI) for Average Joes like me.

Drilling down further, the Big Mac Index illustrates the concept of PPP by using the Big Mac as a benchmark to compare how various currencies relate to one another. The Economist explains that the Big Mac Index is “a lighthearted guide to check whether currencies are at their correct levels.” Furthermore, the BMI shows the exchange rate at which the Big Mac would cost the same in the United States as it would across the world.

Using the graph below with the US dollar as the base currency, a Big Mac in the US would cost $5.36 while its Swiss counterpart costs $7.26. This means that the Swiss francs is overvalued. On the other hand, a Big Mac in Egypt costs counterpart at $1.84, which means the Egyptian pound is greatly devalued.

A future post on exchange rates is in the horizon, so more coming up on overvaluation and devaluation. It is important to note, however, that overvaluation and devaluation as exchange rate policies cannot be sustainable in the long-term and the Big Mac Index helps us gauge this.

In the meantime, if you are overseas and curious to see how much purchasing power your US dollar has in that country, stop by a McDonald’s, and order a Big Mac. You might be surprised by other menu items like the Samurai Mac, Sakura Mochi Pies and Shaka Shaka fries here in Japan.