Did you know that a McDonald’s Big Mac can actually improve the way you look?
Well, it can improve the way your economy looks, anyway.
The world’s most famous sandwich, with its two beef patties, three sesame buns, cheese, special sauce, “fixins” and 29 grams of fat, may be so processed that it doesn’t age if let unrefrigerated for months on end, but that hasn’t stopped economists from finding its inner beauty.
For an economist, the Big Mac represents one thing: consistency in a highly variable world. From country to country, the fast food staple remains relatively stable, which means it can serve as a great comparison tool.
Since 1986, The Economist has used variation in the sandwich’s price around the world to check exchange rates according to a theory of Purchasing Power Parity (PPP), which says that in a perfect market, exchange rates should settle at a point where the same goods in different countries cost the same amount. If the price of Big Macs is not consistent given current exchange rates, the theory goes, the exchange rate may be off.
Of course, there are some valid reasons the prices should be different. Despite best efforts to use identical ingredients and identical processes in each McDonald’s restaurant, there are inevitable differences: the local costs of labor, taxes, transportation costs, and differences in the consumer from country to country. Some countries consider it junk food, others a luxury. Islamic countries use halal meat, beef-averse India uses chicken patties and Israel, of course, uses kosher beef.
In 2001, Israel sat on the extreme end of the Big Mac Index. “Dividing the price, in shekels, of a Big Mac in Israel by the price, in dollars, of an American Big Mac produces a Big Mac PPP of 5.68 shekels to the dollar. Since the market rate is 4.13, this suggests the shekel is 38% overvalued,” The Economist noted. Indeed, the following year, the Shekel cheapened, with the exchange rate dropping to 4.93.
But even as the war-torn years of the early 2000’s faded and the Israeli economy improved, Israel remained on the expensive side of the Big Mac Index. Was Israel just overpriced in general? Was it the expense of the kosher beef, used even in the non-kosher Big Macs priced for the index? Is the Big Mac just more proof that Israel suffers from perpetually high prices, at the heart of last summer’s social protests?
In fact, new research suggests that the price of a Big Mac may actually show some of the more positive aspects of Israel’s economy. According to a new study published by the National Bureau of Economic Research, comparing the price of a Big Mac to the wages workers earn at McDonald’s can say a lot about how advanced an economy is. The study’s author asked how many Big Macs the workers could purchase with an hour’s pay, and discovered that in advanced economies, workers got a lot more burger for their blood, sweat and tears than workers in developing countries.
Whereas in places like Egypt or Pakistan, workers had to put in about three hours to purchase one Big Mac, in advanced economies like the United States or France an hour of work could afford employees two to three of the prized sandwiches.
Israel’s ratio was just below the average of the United States and Western Europe, but came well ahead of Eastern Europe, Asia and the rest of the Middle East. So the next time credit ratings agencies come a-knocking, Israel can gladly tout its “Big Mac Per Hour” wage ratio right alongside its OECD membership.
If you think that sounds ridiculous, think again. Matthew Yglesias pointed out in Slate this week that Argentina exhibits “an interesting price anomaly around the Big Mac. It''s cheaper than a Quarter Pounder.” Why? “The Big Mac Index is one well-known international check on government number-fudging…so the government knows it''s vulnerable to the wrath of the [Big Mac] index. To that end, the Argentine state leaned on Argentina''s McDonaldses to exercise restraint in their Big Mac pricing.”
But in Israel, even as the economy grew and the Shekel strengthened to its current rate of about 3.7, the Big Mac seemed to lag behind. In the latest index, Israel’s was still the 13th most expensive in the world. But, where the state does not interfere, prices too can adjust. Indeed, just last month, McDonald’s slashed its Big Mac price in Israel from 15.90 NIS to 11.90 NIS, a whopping drop of 25 percent (that’s whopping, not Whopper, which is Burger King territory).
At the new price, at current exchange rates, the cost of an Israel Big Mac is actually 1.5% below than that an American Big Mac.
With the kind of economic implications associated with Big Mac prices, Israeli economic reform guru Manuel Trajtenberg may have found his rival in Ronald McDonald.