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The consumer basket, consumer price index, purchasing power, gross domestic product - all these indicators reflect the state of the economy. They are official and serious; they are published by statistical agencies and economic departments. But there are also entertaining economic indicators. With their help, economists try to explain complex ideas through simple things - either jokingly or seriously, they are looking for connections between seemingly unrelated concepts and make forecasts. The most popular of these indicators is the Big Mac Index. Let's figure out what it is, what he is talking about and what other entertaining indicators are.
What is the Big Mac Index?
This is the world's most famous unofficial index - an unusual way to compare currencies and find out the "natural" exchange rate against the US dollar. Why Big Mac? Firstly, it can be bought in almost any country, and secondly, the hamburger contains the most widespread and understandable food for the whole world: meat, cheese, herbs, bread. The index was invented by the publishers of the British magazine The Economist in 1986, based on the theory of purchasing power parity.
What is this theory?
Let's first understand the term “purchasing power”. It is an indicator of how many goods we can buy for a given amount of money. For example, last year 1,000 rubles were enough for you to buy milk, bread, sausage, etc. for a week, but now the same set costs 1,040 rubles, which means that the purchasing power of the ruble has dropped. The fall in the purchasing power of a currency is inflation.
And purchasing power parity is a theory according to which currencies of different countries should be compared by how much money is required to pay for the same product in different countries. For example, if an apple costs 10 rubles in Russia and 1 dollar in the USA, then 10 rubles costs 1 dollar. Consequently, the exchange rate is $ 0.1 per ruble. Because (according to this theory, and not in reality) apples have the same value both in Russia and in the USA.
Thus, according to the theory of purchasing power parity, one and the same product should cost the same in any country, and the exchange rate of the currency should be determined by how much money must be paid for this product.
Imagine two wild tribes meeting for the first time. Both have "money": some exchange goods for rat tails, others for pearls. And at what rate would you order the unfortunate savage people to make an exchange, how many tails to give for a pearl? It would be logical to compare by product: the former have an ax worth 20 tails, the latter have the same ax - 4 pearls. This means that one pearl is worth 5 rat tails. And the way we have just compared the two currencies will remain for centuries as an "ax index."
Is the Big Mac index a reliable way to compare currencies?
Not at all. Since its inception, the index has not been serious, it does not take into account such factors as population demand, the number of imported and local products in each Big Mac, competition, local chain strategy, local specifics and much more. For example, in India, where beef is not eaten, a lamb or chicken cutlet is included in a burger, but when calculating the index, they turn a blind eye to this. In addition, the rate of the domestic currency, and hence the prices, can change dramatically in the country. For example, in 2012, Venezuela had the most expensive Big Macs in the world ($ 7.92), and three years later - the cheapest ($ 0.67). So the index became popular not because it reflects an adequate reality, but because the readers liked it, because it is a fun way to compare currencies.
Why do you need a big mac index in real life?
There is no practical benefit from it, you can only compare currencies through a burger and determine which of them is overvalued, which is underestimated. For example, in Russia a Big Mac costs 130 rubles, and in the USA it costs $ 5 51 cents (approximately 324 rubles as of July 2018). And if you measure the world with big macs, then the ruble is undervalued by about 62%, that is, in the fictional world of the winning parity, the dollar is worth 24 rubles.
According to the Big Mac index, the most overvalued currencies for July 2018 are the Swiss franc and the Swedish krona. All other currencies in the world are undervalued (against the US dollar). The most undervalued currencies in 2018 are the Ukrainian hryvnia and the Egyptian pound.
In the real world, burgeromics doesn't work. So, in 2018, in Russia, 1,000 rubles was enough for us for seven big macs, in the USA - for three, and in Switzerland it would be possible to buy only two big macs, however, there would still be left for potatoes.
Big Mac competitors
Recently, new indices have been appearing - they are based on the same principle as the "bigmach" one, but instead of burgers they use other products and goods. However, such comparisons are no more useful than the Big Mac index.
Latte Index
Analyst firm ValuePenguin measures the world with tall latte cups. And in 2021 in Russia this coffee was the most expensive in the world.
IPod index
Commonwealth Securities of Australia has proposed using the iPod index to analyze the purchasing power of currencies - it compares the dollar price of a 2GB iPod Nano MP3 player.
How else is it fun to measure economic performance?
Dating Index
Deutsche Bank publishes an index of dating for cities every year - Germans build a ranking of the high cost of cities by comparing the price of a romantic set of a taxi ride, a dinner for two in a pub, the cost of two beers and two movie tickets with drinks. In 2017, the most expensive dates were in Zurich. Moscow is in a modest 35th place.
Borscht and Olivier index
The rise in consumer prices can be measured using a specific dish index. For example, in Russia, the cost of a borsch set is regularly calculated (it includes the most popular vegetables: potatoes, cabbage, carrots and others) and the Olivier index, without which the New Year is not New Year. By the way, this index works well - it allows you to assess changes in the prices of the consumer basket.
Red Lipstick Index
This index was invented by the American perfumery and cosmetic company Estee Lauder. According to him, in difficult economic times, women limit themselves to buying expensive clothes, bags and shoes, but they cannot deny themselves the purchase of chic red lipstick. Accordingly, the paradox: the country is in crisis, and sales of luxury lipstick are growing.
Various organizations around the world are inventing their own non-standard indices, with the help of which they try to catch trends in the economy. As a result, unexpected markers appear, for example, sales of men's underpants (the less they sell, the worse things are in the country), the height of the heels and the length of the skirts (the higher the heels and the shorter the skirt, the better the economy develops), and many others. In principle, you can also display your own indicator - for example, determine how the situation in the economy is related to the availability of free bags in supermarkets.
However, it is unlikely that it will be possible to accurately measure what is happening in the world with cups of coffee or the color of lipstick. The economy is a complex process, and it is impossible to draw deep conclusions about the well-being of the population at the price of a hamburger or even a whole pot of borscht. These methods were created rather for the entertainment of readers, and should not be taken too seriously.
What is the Big Mac Index?
This is the world's most famous unofficial index - an unusual way to compare currencies and find out the "natural" exchange rate against the US dollar. Why Big Mac? Firstly, it can be bought in almost any country, and secondly, the hamburger contains the most widespread and understandable food for the whole world: meat, cheese, herbs, bread. The index was invented by the publishers of the British magazine The Economist in 1986, based on the theory of purchasing power parity.
What is this theory?
Let's first understand the term “purchasing power”. It is an indicator of how many goods we can buy for a given amount of money. For example, last year 1,000 rubles were enough for you to buy milk, bread, sausage, etc. for a week, but now the same set costs 1,040 rubles, which means that the purchasing power of the ruble has dropped. The fall in the purchasing power of a currency is inflation.
And purchasing power parity is a theory according to which currencies of different countries should be compared by how much money is required to pay for the same product in different countries. For example, if an apple costs 10 rubles in Russia and 1 dollar in the USA, then 10 rubles costs 1 dollar. Consequently, the exchange rate is $ 0.1 per ruble. Because (according to this theory, and not in reality) apples have the same value both in Russia and in the USA.
Thus, according to the theory of purchasing power parity, one and the same product should cost the same in any country, and the exchange rate of the currency should be determined by how much money must be paid for this product.
Imagine two wild tribes meeting for the first time. Both have "money": some exchange goods for rat tails, others for pearls. And at what rate would you order the unfortunate savage people to make an exchange, how many tails to give for a pearl? It would be logical to compare by product: the former have an ax worth 20 tails, the latter have the same ax - 4 pearls. This means that one pearl is worth 5 rat tails. And the way we have just compared the two currencies will remain for centuries as an "ax index."
Is the Big Mac index a reliable way to compare currencies?
Not at all. Since its inception, the index has not been serious, it does not take into account such factors as population demand, the number of imported and local products in each Big Mac, competition, local chain strategy, local specifics and much more. For example, in India, where beef is not eaten, a lamb or chicken cutlet is included in a burger, but when calculating the index, they turn a blind eye to this. In addition, the rate of the domestic currency, and hence the prices, can change dramatically in the country. For example, in 2012, Venezuela had the most expensive Big Macs in the world ($ 7.92), and three years later - the cheapest ($ 0.67). So the index became popular not because it reflects an adequate reality, but because the readers liked it, because it is a fun way to compare currencies.
Why do you need a big mac index in real life?
There is no practical benefit from it, you can only compare currencies through a burger and determine which of them is overvalued, which is underestimated. For example, in Russia a Big Mac costs 130 rubles, and in the USA it costs $ 5 51 cents (approximately 324 rubles as of July 2018). And if you measure the world with big macs, then the ruble is undervalued by about 62%, that is, in the fictional world of the winning parity, the dollar is worth 24 rubles.
According to the Big Mac index, the most overvalued currencies for July 2018 are the Swiss franc and the Swedish krona. All other currencies in the world are undervalued (against the US dollar). The most undervalued currencies in 2018 are the Ukrainian hryvnia and the Egyptian pound.
In the real world, burgeromics doesn't work. So, in 2018, in Russia, 1,000 rubles was enough for us for seven big macs, in the USA - for three, and in Switzerland it would be possible to buy only two big macs, however, there would still be left for potatoes.
Big Mac competitors
Recently, new indices have been appearing - they are based on the same principle as the "bigmach" one, but instead of burgers they use other products and goods. However, such comparisons are no more useful than the Big Mac index.
Latte Index
Analyst firm ValuePenguin measures the world with tall latte cups. And in 2021 in Russia this coffee was the most expensive in the world.
IPod index
Commonwealth Securities of Australia has proposed using the iPod index to analyze the purchasing power of currencies - it compares the dollar price of a 2GB iPod Nano MP3 player.
How else is it fun to measure economic performance?
Dating Index
Deutsche Bank publishes an index of dating for cities every year - Germans build a ranking of the high cost of cities by comparing the price of a romantic set of a taxi ride, a dinner for two in a pub, the cost of two beers and two movie tickets with drinks. In 2017, the most expensive dates were in Zurich. Moscow is in a modest 35th place.
Borscht and Olivier index
The rise in consumer prices can be measured using a specific dish index. For example, in Russia, the cost of a borsch set is regularly calculated (it includes the most popular vegetables: potatoes, cabbage, carrots and others) and the Olivier index, without which the New Year is not New Year. By the way, this index works well - it allows you to assess changes in the prices of the consumer basket.
Red Lipstick Index
This index was invented by the American perfumery and cosmetic company Estee Lauder. According to him, in difficult economic times, women limit themselves to buying expensive clothes, bags and shoes, but they cannot deny themselves the purchase of chic red lipstick. Accordingly, the paradox: the country is in crisis, and sales of luxury lipstick are growing.
Various organizations around the world are inventing their own non-standard indices, with the help of which they try to catch trends in the economy. As a result, unexpected markers appear, for example, sales of men's underpants (the less they sell, the worse things are in the country), the height of the heels and the length of the skirts (the higher the heels and the shorter the skirt, the better the economy develops), and many others. In principle, you can also display your own indicator - for example, determine how the situation in the economy is related to the availability of free bags in supermarkets.
However, it is unlikely that it will be possible to accurately measure what is happening in the world with cups of coffee or the color of lipstick. The economy is a complex process, and it is impossible to draw deep conclusions about the well-being of the population at the price of a hamburger or even a whole pot of borscht. These methods were created rather for the entertainment of readers, and should not be taken too seriously.