As we struggle to understand what is happening in the financial world, other than a huge restructuring of corporations and sectors—happening every generation or so—and the taking of profits from distressed securities prior to further depression, perhaps this essay using the various prices on the Big Mac can help, though I doubt it, but it is interesting.
An excerpt from the essay from the Federal Reserve Bank in Dallas.
“Readily tradable goods—oil, chemicals, metals and agricultural commodities, for example—tend to sell at world prices. Nontradable goods and services—housing, cab rides and such personal services as haircuts—are largely insulated from global competition, and their prices can vary from place to place.
“Whether goods are tradable, nontradable or somewhere in between influences the international transmission of price fluctuations. Rising prices in tradables are highly likely to spill across borders, while rising prices in nontradables are not. A better understanding of factors that determine prices should help the Federal Reserve and other central banks incorporate foreign price movements into monetary policy decisions.
“That brings us to the Big Mac and what it can teach us about pricing. McDonald’s iconic hamburger is a tiny bit of the world economy, but it’s often used as a rough gauge of relative prices across countries. Since 1986, The Economist magazine has been publishing a Big Mac Index, comparing the hamburger’s international prices. The index shows how much Big Mac prices vary from one country to the next. What’s less well known is the extent to which Big Mac prices diverge across the U.S., regions, Texas and even Dallas. The reasons for the disparities help us sort out how international, national, regional and local factors shape prices—at least for one product.
“The Economist concocted the Big Mac Index with a sly wink and didactic purpose—“to make exchange-rate theory more digestible.” The Big Mac stood in for the market baskets of goods and services that economists use to measure purchasing power parity, an alternative to market exchange rates for comparing output or consumption in different countries.
“The attractive feature of the Big Mac as an indicator is its uniform composition. With few exceptions, the ingredients of the Big Mac are the same wherever it’s sold. Other global products could be used for a prop in this exercise—a Coca-Cola, a Starbucks coffee, an iPod—but, over the years, the Big Mac Index has been a quick guide to prices in many countries. In July, The Economist presented Big Mac prices in local currencies and U.S. dollars for 45 countries, showing a range from $1.70 in Malaysia to $7.88 in Norway. The U.S. fell into the middle of the pack, with an average Big Mac price of $2.99 (see abbreviated list, Table 1). These differences are typical of the price disparities The Economist has found over more than two decades.”