Dugan: Of Big Macs & economics

BY JACK DUGAN | JULY 21, 2015 5:00 AM

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The Economist’s famous Big Mac index is a novel method of measuring the currency value of nations worldwide and is based on something called the theory of Purchasing Power Parity. The Economist defines it as “the notion that in the long run, exchange rates should move toward the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries.”

But why the Big Mac? The assumption could be made that some other good, which transcends borders, could be used as a base measurement. Perhaps such as a gallon of milk.

The Economist at first used the Big Mac as the standard to make a dry subject a degree more palatable, but since the article’s initial publication in the magazine in 1986, the Big Mac has slowly become the global standard for measuring the purchasing parity. At this point, the measurement has been “included in several economic textbooks and the subject of at least 20 academic studies,” according to the Economist.

The notion of a quick academic acceptance of an otherwise tongue-in-cheek, humorous jab in one of the most popular economic magazines in circulation is telling of something more. With the dollar heralded as the global standard since the Second World War, and the Big Mac rooted in the value of the dollar, it reaffirms a sense of total global financial domination that the United States has seemed to adopt since the postwar boom.

With McDonald’s being the poster villain of American capitalism, the Big Mac index is also a symbol of U.S. hegemony. According to Business Insider, the fast-food titan feeds around 68 million individuals every day, which is about 1 percent of the global population, meaning each year, menu items such as the Big Mac feed the world three times over. This absurd number of global sales also makes it the world’s 90th largest economy, with yearly revenue hovering around $27 billion.

Though the United States’ firm global financial iron grip and McDonald’s super-sized profits seem like infallible truths in an otherwise unreliable, chaotic world, change may be found at the bottom of the greasy bag, rather than those few strange extra crunchy French fry stragglers.

The average American Big Mac will cost around $4.79 if people were to walk out their front doors right now and pick one up. The Chinese Big Mac, if people were to walk out their doors, catch an international flight, and land in China tomorrow, would run the consumer about $2.74. According to the Economist, the “raw” Big Mac index says that the yuan was undervalued by 43 percent at that time.

Of course, what really is the benefit of an undervalued currency, the trusty Big Mac has proven once again the valor and might of the American dollar. But, when foreign money buys more merchandise, or for example, the American dollar buys more Chinese merchandise because of an undervalued yuan, this promotes foreign investment and Chinese exports grow.

At this point, it’s not a matter of whether or not the Chinese economy will overtake the American economy. It’s a matter of when. Some say five years, while others say 10.

Although that may seem arbitrary at this point, what remains to be most interesting in a situation such as this is to see the United States dethroned for the first time in almost a century and how that will affect global culture. Perhaps we will be seeing a Peking Duck index in 2050?

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