Taking a Bite of Burgernomics
Cost of living has risen over the years and its ripple effect can be felt through each household. Let’s take a bite-sized look at the Big Mac Index and how it gauges the effects of this ripple on the job market in countries across the globe.
The middle-class income group is feeling the pinch with their purchasing power and while the upper income group reap the benefits of the economies of scale, the lower tiers are still bound by hurdles such as security, education and health.
What is the Big Mac Index?
The Big Mac index (BMI) has been published annually by The Economist since 1986 and is rated as a simplified indicator of a country’s individual purchasing power. As many countries have different currencies, the standardised Big Mac prices are calculated by converting the average national Big Mac prices with the latest exchange rate to the American dollar.
The Big Mac, as the top-selling McDonald’s burger, is used for comparison because it’s available in almost every country and manufactured in a standardised size, composition and quality. As such, BMI has been used in a variety of publications over the years by scholars and economists to compare the cost of living in countries, against the American dollar. Despite having its limitations, BMI is often used as a tool to gauge the country’s purchasing power.
In January 2019, The Economist released the latest BMI data which states, ‘A Big Mac costs GBP3.19 in Britain and USD5.58 in the United States. The implied exchange rate is 0.57. The difference between this and the actual exchange rate, 0.78, suggests the British pound is 27 per cent undervalued.’
This indicates the greenback is stronger than the British pound and the comparison across other currencies show that the American dollar is relatively higher than most developed and emerging markets. Only Switzerland, Norway and Sweden hold a higher purchasing power than the United States, according to the report. The Swiss franc is 19 per cent overvalued against the American dollar, the highest in the ranking. Norway took second spot at five per cent while Sweden is 4.6 per cent above the greenback.
Purchasing Power vs Wages
The generalised average consensus is that if purchasing power in a particular country is on a rise, so too should the average wage. This belief does not hold true though, considering factors such as the rate of inflation, quality of living and unemployment rate.
Switzerland is number one in the January 2019 BMI rankings and according to Expatica, Switzerland had the highest average annual wage compared to its fellow European countries, except for Luxembourg. The average salary in Switzerland is among the highest in the world, but so is the cost of living.
Expatica reports that salaries in Switzerland can vary significantly between regions, so does the cost of living. For instance, data from the Conference of Education Directors for German-speaking Switzerland, reveals an upper secondary school teacher in Zurich can earn around CHF110,590 from the first year, while a teacher in neighbouring St Gallen earns around CHF15,000 less.
However, the scenario is different in the United States. According to MarketWatch, Americans are not feeling the benefit despite the roaring American job market. The average American is feeling the pinch especially the middle class when it comes to wages earned.
Real wages effectively declined in 2018, according to figures released in early 2019 from the PayScale Index, a formula from the Seattle-based salary comparison site. PayScale reported the median wage increases, when adjusted for inflation, were only 1.1 per cent since last year and one per cent over the past year. However, the modest uptick in nominal wages failed to bring real wages out of the red for the year.
MarketWatch also revealed that it’s the executives and CEOs who are benefiting from the market boom as the average workers struggle to make ends meet. Pay ratios of Fortune 500 company CEOs to their employees range from two to one to nearly 5,000 to one, according to a 2018 report by the staff of Keith Ellison, when Ellison was the Democratic congressman for Minnesota. Ellison is now the Attorney General-elect of Minnesota. The average CEO-worker ratio is 339 to one.
The Cheapest Big Mac
In figures published by the The Economist, Russia took top spot as the least expensive place to buy a Big Mac where it costs RUB 110.17 and USD5.58 in the United States. The implied exchange rate is 19.74. The difference between this and the actual exchange rate, 66.69, suggests the Russian rouble is 70.4 per cent undervalued. Thus, taking second spot is Ukraine, with Turkey and Argentina coming in third and fourth respectively.
Meanwhile, Malaysia complete the top five of the ranking, as a Big Mac in the capital costs RM9.05 and USD5.58 in the United States. The implied exchange rate is 1.62. The difference between this and the actual exchange rate, 4.12, suggests the Malaysian ringgit is 60.6 per cent undervalued.
Therefore, Malaysia is the most affordable country in Southeast Asia to purchase a Big Mac. Does this mean that the wages in Malaysia are comparatively lower than its neighbouring Asian countries such as Singapore, Vietnam or even Thailand?
The answer lies in the economy of the country and it also depends on the value of the currency in the region. Among the three countries mentioned, Singapore boasts one of the most advanced economies in the region. With a stable currency in place, coupled with a strong port presence, the republic has a higher purchasing power over its neighbours. Wages in Singapore are relatively higher than Malaysia and this can be attributed to the level of inflation as well as the strength of the Singapore currency.
In a Nutshell
BMI, also known as Burgernomics, is a useful tool to gauge the cost of living between cities. It can paint a picture of how the country in question stack up against other currencies in the region. In general, big cities have high paying jobs, but so too comes the high cost of living such as rent, transportation and sustenance. To sum it up the BMI is a light-hearted way to make exchange-rate theory more digestible.
Photo by Luísa Schetinger on Unsplash