Big Mac Index Measuring Purchasing Power Parity Globally

Wikipedia: The Big Mac Index is a price index published since 1986 by The Economist. It is an informal way of measuring the purchasing power parity (PPP) between two currencies and providing a test of the extent to which market exchange rates result in goods costing the same in different countries. It “seeks to make exchange-rate theory a bit more digestible. The index compares the relative price worldwide to purchase a Big Mac, at McDonald’s restaurants. The results from November 2022.

The theory underpinning the Big Mac index stems from the concept of purchasing power parity (PPP). PPP superimposes the same Big Mac in various countries priced in the currency of that country and compares the exchange rates between various currencies. Given the value of each currency each should equalize the prices charged if using an identical basket of goods.

In reality, obtaining and sourcing an identical basket of goods in every country is a complex challenge. According to the Organization for Economic Co-operation and Development (OECD), there are over “3,000 consumer goods and services, 30 occupations in government, 200 types of equipment goods and about 15 construction projects” to consider in the PPP calculations. To simplify an important economic concept, The Economist proposed that a single McDonald’s Big Mac could be used instead of a basket of goods. 

If you go over to Trader Dads, you can see his version of The Happy Meal Index. Trader Dad is proposing The Economist should start publishing a similar Index called the “Happy Meal” index. The Happy Meal Index helps to visualize the cost of feeding a child in any given country or region. The higher the cost, the higher the strain of raising children is for an average family. Plus you can get a cool toy for a Disney movie coming out soon! That is as long as they have them in stock.

Trader Dads’ concept postulates over the longer run, the tracking costs of feeding a child having strong predictive powers for GDP growth, helps estimate future changes in the birth rate, generational population fluctuations and work force participation figures both now and down the road.

Trader Dad also rightfully suggests “Kids ain’t cheap! According to USDA data and inflation statistics from the BLS, raising a child in 2023 could cost an average of $331,933 from the time a child is born to age 18.  At the low end of most estimates, a U.S. family of four spends about $11,700 per year on food at home with each child costing about $2000-$2500 per year.”