Part of the joy of reading the economist is the dry and irreverent wit that the editors customarily lace their opinion pieces with. Occasionally, they come up with brilliant concepts like the Big Mac Index, which graphically demonstrates the relative valuation of currencies, and is the centerpiece of the field of study called Burgernomics.
Here’s the definition (which can be found on this page on economist.com):
Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. This in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “Basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
If only the economics textbooks from my JC days (by Samuelson and Lim Chong Yah) could have been as entertaining and enlightening.
On top of being a hugely appropriate model for understanding foreign currency valuations, Burgernomics opens the door to a series of ghastly puns. Consider these article titles that have appeared over the years – “Cheesed Off”, “Food for thought”, “McCurrencies” and “Where’s the Beef?”.
In the latest article on Burgernomics (Purchasing power: An alternative Big Mac Index | The Economist), reference is made to a UBS report (Prices and Earnings 2009) that ranks the world’s most expensive cities to live in, and as an aid to understand the relative cost of living in these cities, provides a comparison of prices of specific and highly uniform products available practically everywhere. The genius emerges when the UBS authors calculate how long an employee would have to work to be able to afford these ubiquitous products in each city.
Applying this concept to Big Macs, one gets the graphic in the latest economist burgernomics article that shows how a Tokyo employee can afford a Big Mac after just 12 minutes of work, whereas a Singaporean employee has to work for 36 minutes to enjoy the same. In Jakarta, the average wage earning employee has his patience tested by having to work 135 minutes – more than 10 times the time taken for his Singapore contemporary.
This illustrates beautifully that although Singapore is a much “cheaper” city to live in than Tokyo (24th vs 5th position in the UBS ranking), Singaporean workers are paid disproportionately less than the Japanese and thus end up worse off. At least when it comes to Big Mac affordability. Fortunately for Singaporeans, Man does not live by bread alone. Food for thought.