What Big Macs can tell you about the global economy | The Economist

I've eaten probably. the world's most expensive. Big Mac in Switzerland. I've also eaten one of the world's. cheapest Big Macs in Taiwan. and I was very curious to discover. whether they taste the same. And I'm happy to report that they do. And that's the reason why. we adopted the Big Mac. as our universal. standard of purchasing power. This is not my idea. I've been writing about the Big Mac. for just 20 years, a mere half of its life. The idea came from.

someone mentioning to Pam Woodall, our then economics correspondent, quite how expensive burgers. were in certain parts of Europe. and that gave her the inspiration. She describes it. as this “bathtub moment”, this eureka moment. that perhaps the price of a burger, a standardised burger, could tell us something. interesting about currencies. And indeed it does. The reason why. these prices diverge so much. is because some currencies. are overvalued, others undervalued. Henry, tell me a little bit.

about the. underlying economics here. Well, the idea is. purchasing-power parity, the idea that currency. should exchange. should exchange. at the rate implied. by their purchasing power locally. And it works very well because, as Simon said, the Big Mac is the same. everywhere, but also. because the Big Mac is. actually quite representative. of local economies. It contains some things that are. globally traded, some things that are. only locally available. It reflects the cost of labour.

and rent locally and so on. So it's a very effective proxy for that. So Josh, the billion-dollar question is. do traders actually use this? Well, yeah, it's a meaty. question, isn't it? We have to stop. We have to call a truce on puns. at this point. So I think in one way, no, it does not predict short-term. movements of currencies. Imagine if a well-known signal. that is quite easy to construct, like this, did tell you how currency markets. were going to move in the short term. and you could trade profitably on it.

Well, obviously professionals. would construct it themselves. They'd use it immediately. They'd already harvest the gains. and the signal would go away. Over the longer term. it has sometimes been a sort of weak, six-to-ten-year signal. of where currency markets are going. So a feature of currency markets, even more than others, like stocks and bonds, is that their returns. are wildly unpredictable. and this doesn't really help you. In another sense, however, if say. I’m an investor. thinking of investing. in a Korean clothing chain.

or a casual-dining group, then a concept. like purchasing-power parity. is very useful to me. because I need to know. how wealthy do. Korean households feel. over and above what's implied. by exchange rates. So I definitely need. signals like this.