The Big Mac Index- Tracking Worldwide Standards of Living

June 15, 2012

A Big Mac has 540 calories and 29 grams of fat.  It also contains important economic information that The Economist and others use to compare international prices and wages.

In January, a Big Mac cost $6.81 in Switzerland, $4.20 in the U.S., $2.44 in China and $1.96 in India.  The hourly wage at a McDonald’s (“McWages”) in each of those countries was $15.00, $9.24, $1.46 and 78 cents, respectively.  Economists divide the cost of the Big Mac by the McWage to get “Big Macs per Hour” or BMPH in comparing countries.  In the U.S., Canada and Western Europe, our BMPH is 2.2 (hourly earnings at a McDonald’s are 2.2 times the cost of Big Mac).In China the BMPH is .6 and in India only .4.  So, in India, McDonald workers would have to work 2 ½ hours just to be able to buy a Maharaja Mac (made of chicken, not beef.)  These numbers change over time and that’s what they economists are tracking.

The Big Mac Index was started in 1986 to attempt to track “purchasing power parity (“PPP”)” used to evaluate market exchange rates, currency valuations and cost of living changes across the globe.  Mc Wages and Big Macs were selected because they are uniform and ubiquitous.  Sandwiches are produced worldwide according to a rigidly uniform process detailed in a 600 page manual.  Identical burgers are produced in every city.  This produces an ideal environment for global productivity comparisons.  BMPH represents a PPP-like calculation of the real wage, taking account the local cost of goods.

The Big Mac Index demonstrates the vast gulfs in worldwide productivity and standards of living.  The gaps are in fact shrinking.  In the U.S., our BMPH was 2.4 in 2007.  Now, the McWage is up 26% in four years, but the cost of the Big Mac is up 38%, partially due to increases in food prices.  The net 9% drop in our BMPH is one sign of a reduced overall standard of living.  In Russia, the BMPH increased an astounding 152% from 2000 to 2007 and has increased another 42% from 2007 to 2011.  China has had increases of 60% from 2000 to 2007 and another 22% from 2007 to 2011.  India saw a large increase of 53% from 2000 to 2007 but their BMPH declined by 10% from 2007 to 2011.  It’s no surprise that more progress in standards of living was made by the BRICs and other developing countries from 2000 to 2007 than from 2007-2011.

Yes, our BMPH has gone down slightly here in the U.S. over the last decade.  Even so, we’re still the envy of the entire world, by far.  Time to celebrate- with a Big Mac and fries.