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February 22, 2017

Burgernomics: A Big Mac Index update

By Kevin Theissen

Ahh, the Big Mac. Two all-beef patties, special sauce, lettuce, cheese, pickles, onions – on a sesame seed bun. The special sauce actually is not a secret and has been available for years – it consists of mayonnaise, sweet pickle relish and yellow mustard whisked together with vinegar, garlic powder, onion powder and paprika. The Big Mac is loved all over the world, has two new sizes and is one of President Trump’s go-to meals. It was created in 1967 and sold for 45 cents.
The Economist invented the “Big Mac Index” in 1986 as an entertaining way to assess whether currencies were at the “correct” levels. The index reflects the idea that countries’ exchange rates should balance so the same product (in this case, a hamburger) costs the same in two different countries when the price is denominated in the same currency. After updating the index on January 11, 2017, The Economist reported the “all-meaty” dollar was stronger than usual:
“The dollar is now trading at a 14-year high in trade-weighted terms. Emerging-world economies may struggle to pay off dollar-denominated debts. American firms may find themselves at a disadvantage against foreign competition. And, American tourists will get more burgers for their buck in Europe.”
A Big Mac in the United States cost about $5.06 last week. In the Euro area, the price was about $4.06 and in Britain $3.73. A Big Mac is cheapest in Russia ($2.15) and most expensive in Switzerland ($6.35). Here are the prices of a Big Mac (a.k.a. the Maharaja Mac in India) in a few other locales:
Norway: $5.67
Sweden: $5.26
Brazil: $5.12
Japan: $3.26
China: $2.83
India: $2.49
Mexico: $2.23
It should be noted the Big Mac Index is not a perfect measurement tool. The price of a burger should be less in countries with lower labor costs and more in countries with higher labor costs. When prices are adjusted for labor (using gross domestic product per person), the Brazilian real is the world’s most overvalued currency, followed by Pakistan and Thailand. The most undervalued currencies include Egypt, Malaysia, and Hong Kong.
Kevin Theissen is principal and financial advisor at Skygate Financial Group, LLC., located on Main Street in Ludlow, Vt. He can be reached at kevin@skygatefinancial.com

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