Sir, – I was intrigued to read that McDonalds UK and Ireland are increasing the price of its cheeseburger from €1.50 to €1.70 in Ireland and from £0.99 to £1.09 in the UK. The price discrepancy based on current exchange rates (EUR/GBP 0.84) of €1.70 versus an implied €1.30 in the UK results in a significant difference!
The Big Mac Index is an informal back-of-the-envelope calculation which has been published by the Economist magazine since 1986. It quickly and easily replicates the complex exchange rate theory called purchasing-power parity (PPP). PPP states that the exchange rate between two currencies should ensure that prices for an identical basket of goods should be equal. The Economist uses the Big Mac as a quick, and very limited, proxy for all consumer goods. The reason is that the burger is consistent across different countries and in most cases, the inputs are local, an imperfect but very convenient short-cut. While it is accepted that real market exchange rates may deviate from the implied PPP rates on occasion, it is also accepted that on average over time both the market and theoretical implied rates should be similar.
Using burgernomics, but applying it to the cheeseburger rather than the Big Mac, reveals an implied PPP exchange rate of EUR/GBP 0.64 after the price increase! So what conclusion can we draw from this rather simple analysis?
Is the euro significantly overvalued against sterling or are we back to the old rip-off republic days? – Is mise,
DERMOT HARDY,
Dublin 18.