Or in the case of the Big Mac Index–cheeseburgers. So Norway as a whole has a lot of value to the rest of the world because of what the country produces, this in turn determines how much Norway’s currency is worth. So that’s all taken into account on the global market and then the value of currency is determined. Norway has a lot of natural gas and oil which has a high value on the global market. Why is it so high? Partly because Norway produces a lot of natural resources.
It’s basically taking everything that a country is worth and then dividing that worth by the population. What does that mean? It means that Norway produces good and services valued at that amount per person each year. Norway’s GDP is nearly $100,000 per person. But it’s really interesting and important in understanding why you can’t buy a burger for two bucks all over the world. You have to look at GDP per capita (gross domestic product). Not exactly, it’s more complex than this.Ī person in Norway has an average income of $34,000 (USD) per year while the average citizen of Malaysia makes $11,500 (USD) per year.īut the average income in other countries is higher than Norway, you say? The Big Mac Index reflects that a burger in Norway costs more than in the Malaysia because people in Norway can more easily afford to pay $8 (USD) for a burger. So what does the Big Mac Index tell us about currencies?Īt first, my mind jumps to comparing the prices of Big Macs between countries based on what a person using that currency can afford.
When you buy foods using the yuan, US dollar, yen, sterling, peso, the euro or others, the reason they cost different amounts is based on a complex range of factors. The cost of any good or service around the world is valued at different prices. It’s not just the Big Mac that varies in price globally. Since McDonalds’ has over 35,000 locations in more than 100 countries, it’s worked pretty well in explaining purchasing power parity, aka the bang you get for different bucks. However you feel about McDonalds, it’s nice when economists at least try to make economic theory sound fun to others. It was started back in the 1980s by The Economist as a fun way to get people to learn about how currencies are valued at different rates around the world. Have you ever complained about the price of an avocado, or a pair of shoes, a video game, or even how much rent you’re paying among friends or family living in different areas? Ever wonder why these products have such drastic variations in prices depending on where you are around the globe?Įnter-the Big Mac Index.