Saturday, June 9, 2012

Using the McDonald's Big Mac to Compare International Productivity Trends

For the Big Mac diner, the U.S. standard of living is declining---at least as far as Big Mac purchases are concerned.  An American now needs to work7%  longer earn the money necessary to buy a Big Mac.

Since 1986 The Economist has been reporting the Big Mac index as a way to look at currency valuations. Now, in a working paper for the National Bureau of Economics Research Orley Ashenfelter and Stepan Jurajda have used Big Mac production to examine productivity and welfare gaps in different economies. The authors began gathering data on McDonald’s wage rates (the McWage) and Big Mac prices in 1998 in 13 mostly rich countries but have since expanded to include more than 60. Their efforts show that McWages are roughly comparable across the rich world (see chart, left panel), though rigid minimum-wage laws in western Europe make it a bit of an outlier. Among emerging economies, wages vary from 32% of the American level in Russia to about 6% in India.

Dividing the McWage by the local price of a Big Mac gives what the authors call Big Macs per hour (or BMPH), an alternative calculation of the real wage at purchasing-power parity. Note well: Between 2000 and 2007 America’s McWage rose by 13% while the Big Mac price jumped by 21%, resulting in a net reduction in the BMPH real wage of 7% (see chart, right panel). Meanwhile, the BRICs advanced as McWages grew faster than Big Mac prices. The going has been slower since then, with food prices rising faster than McWages. See full article here.

1 comment:

  1. With the caveat that I dont know much about macro stuff, the Big Mac in India is not the same good as Big Mac in America. Even if we put aside the fact that McDs in India are not as ubiquitous as they are in US and they definitely taste much better, the consumers of each are different. Up until 2005(till when I have eaten in an Indian McD) I know McDs were not even there in many states and sometimes only a couple of cities in a state. The clientele is mostly medium to high middle class (probably mostly high). My point is only that the numerical relationship may be distorted due to McDs being different goods in different countries(this effecting the kind of people employed in each). Meaning rather than difference being 10 times it may be 20 times. In India there are obviously many problems (govt accounting, inflation, property rights, other inefficient laws like bankruptcy etc etc) so I dont doubt their general conclusions between developed and developing countries have some merit, numerical assessment however is another thing.