Burgers, Fries & Purchasing Power Parity

22 September 2022
Burgers, Fries & Purchasing Power Parity

₹190.34- That’s the cost of a Big Mac in any McDonald’s in India. That converts to around $2.39. So obviously, that’s how much it should cost in the United States where the culinary delicacy originates from. Right?

The cost of a Big Mac in the US is around $5.15, which converts to around ₹410!

Are we being played? Are Indian McDonald’s outlets not as authentic? Do you have to go all the way to the US to taste an ACTUAL Big Mac? Well, maybe not. Because the most expensive Big Mac is not in the US, but in Switzerland.

The cost of a Big Mac in Switzerland is around 6.48 Swiss Franc which is equal to $6.71 which in turn is equal to ₹534. That’s Rs.100 more than what you’d have to pay in the US and ₹340 more than what you pay in India.

So what’s with all the jumping around the world you may ask, why is the cost of a Big Mac different in different countries?

Well, this abnormality is what the “Big Mac Index” is based on.

It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

It basically tells you the value of goods your currency can buy compared to another country’s currency. The Big Mac Index gave rise to what most economists refer to as ‘Burgernomics’, measuring how over or undervalued a currency is based on how much more or less a Big Mac costs in that country.

Coming to India, here’s an interesting fact. India is ranked 6th by GDP, but 3rd by GDP on PPP basis. GDP refers to the total monetary value of the goods and services produced within one country.

GDP comparisons using PPP are used when assessing the domestic market of a country because PPP takes into account the relative cost of local goods, services and inflation rates of the country, rather than using international market exchange rates, which may distort the real differences in per capita income. It is however limited when measuring financial flows between countries and when comparing the quality of the same goods among countries.

This is why, it’s safe to say that when you pay lesser for a Big Mac in India, you’re also getting a lower quality (in terms of taste, not hygiene) version of the burger too. For starters, the Big Mac in the US uses beef patties and not chicken patties, and beef is usually more expensive than chicken.