Burgernomics: the economics of the Big Mac standard

In the course of PPP research, much of the debate over the validity has been over the choice of an appropriate ‘basket’ for making purchasing power comparisons. The different compositions of goods and services in these baskets across countries have resulted in arguments against their usefulness for PPP purposes. This problem is augmented by the existence of productivity differentials in traded and non-traded goods across countries. Therefore we consider the use of the Big Mac as the international monetary standard as being a more palatable alternative: It is produced locally in over 80 countries around the world, with only minor changes in recipe and thus has the flavour of ‘the perfect universal commodity’. Our results indicate that the Big Mac Index is surprisingly accurate in tracking exchange rates over the long-term, which is consistent with previous PPP research findings. We subsequently enhance our PPP comparisons by taking into account the productivity differentials between countries and excluding non-traded goods from the Big Mac Index to derive the No-Frills Index.