Burgernomics: How the Big Mac suggests the shekel is too weak

Economists have compared the price of a Big Mac worldwide to gauge the relative strength of currencies - but the results should be taken with a pinch of salt.

A McDonald's Big Mac burger. (photo credit: COURTESY MCDONALDS)
A McDonald's Big Mac burger.
(photo credit: COURTESY MCDONALDS)
Dismissing growing industry concerns over the soaring value of the shekel, a famous combination of two beef patties, a sesame-seed bun, pickles and American cheese suggests that the Israeli currency actually remains too weak.
The lighthearted Big Mac Index, invented by The Economist in 1986, is based on the theory of purchasing-power parity (PPP) – an economic theory comparing currencies through a common basket of goods or even the world’s most famous hamburger, known for its identical recipe, secret sauce and worldwide popularity.
The latest publication of the biannual index reveals that a hungry consumer in Israel will need to pay NIS 17 for a Big Mac, compared with $5.67 in the United States – implying an exchange rate of 3.00. Yet the actual dollar-shekel exchange rate stands at 3.46, suggesting that the shekel is undervalued by a margin of 13.3%.
According to the index, which compares a whopping 55 countries and the eurozone, the Swiss franc and the Norwegian krone are the only currencies overvalued against the US dollar. At the weakest end of the secret-sauce spectrum, a Big Mac in South Africa costs just 31 rand, with an implied dollar exchange rate of 5.47. The actual exchange rate of 14.39 suggests that the South African rand is 62% undervalued.
For Israelis seeking a cheaper bite, the beef-based index reveals that the euro and the British pound are weaker than the shekel by 7% and 11%, respectively.
While the British weekly does admit that so-called “burgernomics” was never intended as a precise gauge of currency misalignment and simply intended to “make exchange-rate theory more digestible,” the Big Mac Index and similar PPP applications have become the subject of serious academic study.
“For those who take their fast food more seriously, we also calculate a gourmet version of the index for 55 countries plus the euro area,” the index’s authors wrote.
Addressing the expectation that burgers will be cheaper in poor countries, where labor costs and commodities are likely to be lower, the Big Mac Index also offers a formula adjusted to GDP per person, which may present a “better guide to the current fair value of a currency.”
Although a Big Mac costs 13.3% less in Israel than the US at market exchange rates, the adjusted index states that the burger ought to cost 16% less based on differences in GDP per person. Accordingly, this suggests the shekel is actually overvalued by 2.9%.
Despite providing a set of data that is easy for consumers to swallow, some economists suggest that the index should be taken with a McDonald’s-size pinch of salt.
Given its simplicity, critics argue the index fails to consider a range of local factors – such as transportation and taxation costs – that can significantly impact the price of products and overlooks variations in the price of a Big Mac in different cities.