BURGER MEALS ACROSS THE WORLD AS THE BASIS FOR EXCHANGE RATE COMPARISON?

Anand Narayan, Editor

A recent Times of India headline claimed, “You can bet your last burger that the rupee is undervalued.” This is in reference to the Big Mac Index, which was a survey conducted by The Economist in 1986, which aimed to measure purchasing power parity (PPP). It is the theory that states that the exchange rates will go up or down in order to keep purchasing power constant across economies around the world. It states that the price of a Big Mac across the world can speak about the prevailing exchange rate. In accordance with this theory, the Indian rupee (INR) is undervalued in comparison to the US dollar (USD). The problem does not arise whether the INR is undervalued or not; it is a known fact that it is undervalued in comparison with the USD. The question arises whether the Big Mac Index is the most suitable technique for measuring PPP.

One cannot consider the Big Mac Index for a country like India where a Big Mac is not considered a staple meal for the general population. It can be considered more of a luxury good. People visit places like McDonald’s or Burger King normally just to enjoy themselves with friends or family wherein spending a large amount once in a while is the reason for the demand. It would not be something they would do daily. Therefore, the price structure of a Big Mac in India would be different from one in the USA. Furthermore, there are strict government laws in place in India. The ban on selling beef in such outlets changes the entire business model that McDonald’s USA thrives on. The Big Mac in the USA has a beef patty as its main component. However, in India, the main component is either a potato or a chicken patty. These kinds of cultural differences make the Big Mac a suitable base product for an objective comparison. This particular index cannot be used for countries such as China, Japan, and Russia which also have an undervaluation in their respective currencies in comparison to the USD. They too, suffer from similar limitations that come with this particular index.

In conclusion, although the INR is indeed undervalued, one cannot use the Big Mac index to support the claim. There are claims that considering other commodities such as rice, petrol or vegetables too, would also not be a suitable one as it is not consumed equally across the world. Wheat, on the other hand, is probably the most suitable commodity to consider as it is the most widely used raw material for staples across the world. Wheat serves as the base product for chapatis, rotis, burritos as well as burgers. Therefore, by comparing the prices of wheat across the world, one can form a better conclusion about different PPP and exchange rates.