Last week, The Economist released its Big Mac Index (via Catherine Rampell of The New York Times Economix) which basically compares how much it costs to buy - you guessed it - a Big Mac in countries across the world. The magazine explains the index as a:
...lighthearted attempt to gauge how far currencies are from their fair value. It is based on the theory of purchasing-power parity (PPP), which argues that in the long run exchange rates should move to equalise the price of an identical basket of goods between two countries. Our basket consists of a single item, a Big Mac hamburger, produced in nearly 120 countries. The fair-value benchmark is the exchange rate that leaves burgers costing the same in America as elsewhere.
And it goes on to note a number of caveats about it:
The Big Mac numbers should be taken with a generous pinch of salt. They are not a precise predictor of currency movements. The bulk of a burger's cost depends on local inputs such as rent and wages, which tend to be lower in poor countries. Consequently PPP comparisons are more reliable between countries with similar levels of income.
The chart above (from The Economist) shows how the world's major countries shape up on the Big Mac Index. Basically, Asia is the cheapest place to buy a Big Mac, while burgers are pricier in Europe, Scandinavia, and Canada.
In keeping with the same lighthearted spirit as The Economist, my colleague Charlotta Mellander and I decided to look at how the Big Mac Index stacks up against key measures of economic prosperity and well-being, running a series of basic correlations and plotting some scatter-graphs of it against key measures of economic and social well-being. As usual, we point out that correlation does not imply causality, but simply points to associations between variables, and other intervening variables may come into play.
The Big Mac Index is closely associated with economic output - measured as Gross Regional Product per capita with a correlation of .55. The scatter-graph shows the relationship between the two.
The Big Mac Index is also associated with a key indicator of the transition to modern, post-industrial economies: the creative class - a measure of the percentage of the workforce employed in science, engineering, and technology; business, management, and law; health care; education; and arts, culture, design, entertainment, and media occupations. The correlation between the two is .35, indicating a reasonably close association.
On the flip side, the Big Mac Index is negatively associated with blue-collar economies, being negatively associated with the percentage of the workforce in manufacturing, construction, and other physical labor work - the correlation being -.53.
The Big Mac Index is positively associated with life satisfaction - as measured by Gallup surveys. The correlation between the two is .62 - the highest of any (see the scatter-graph above).
When all is said and done, the Big Mac Index appears to follow the logic of economic development - reflecting the more general costs of living in the world's most advanced and wealthiest economies.
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