Burgernomics: How can a burger determine the value of a currency?
Curated from: smallcase.com
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What can burgers possibly tell us about the economy?
The price of burgers has always been a reliable indicator of the state of the economy. When the economy is good, people are willing to spend more money on beef and other luxury items.
- Burgers provide us with an indicator as to how much currency is being printed through the amount spent purchasing food.
- Burgers stand as a test to see whether the currency is being used as an incentive to save money (i.e., a store of value).
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The Big Mac Index
McDonald's global popularity is likely why the Big Mac was chosen as the cheapest hamburger to fill with economic indicators for many countries.
The Economist devised this interactive comparison tool in 1986 called The Big Mac Index. It was intended to serve as a guide when viewed in comparison with the exchange rates of various currencies. Or put it this way: A tool to measure currency exchange rates.
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How can Big Mac help us understand a country's purchasing power?
- Utilizing Purchasing Power Parity or the PPP theory, future exchange rates are predicted based on the worth of products that the respective currencies can purchase.
- Comparing local prices for Big Mac in different regions of the world shows the difference in the PPP, currency, and demand.
- This is where the Big Mac Index comes into play. We use Burgernomics to calculate which currency is undervalued or overvalued.
- We rely on Burgeronomics to work out which foreign currency is currently under-priced or overpriced.
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CURATOR'S NOTE
Countries also use Big Mac burgers as an economic indicator to understand purchasing power.
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