Let them Eat Burgers

At one of our pie parties this year, Bob B. mentioned his family was hosting a visitor from Germany who observed that her currency, the euro, was much stronger than ours.  This opinion was based on the fact that one euro bought a good bit more that one dollar U.S. when being exchanged.  Currency traders would have been quick to disagree, and rightly so, but how can we explain the difference in exchange rates in a more accurate fashion?

The Economist, a British weekly, long ago began to employ a couple of methods intended to gauge the relative value between currencies.  The first, and more academic of the two, is called purchasing power parity (PPP).  It attempts to measure variables between nations that reflect how much people throughout the world pay for similar items in their native coin and how long the average worker must stay on the job before earning enough to buy it.  Bob’s visitor would have been better served to focus on the first part of that equation instead of exchange rates.

How to illustrate that point brings us to the second method employed by The Economist when discussing PPP.  They sought to answer a seemingly simple question: what item(s) should we use  to compare relative cost between countries around the world.  Whatever is chosen should be readily available to the general population, virtually identical everywhere, and generally within the reach of the average citizen.  What would you use?  They chose McDonald’s Big Mac.

McDonald’s tries to apply stringent quality control on this signature item regardless of the country where it is served, using locally baked or raised products and produce.  The basic ingredients are thus quite similar and work well when calculating PPP; only costs such as labor, land use, and taxes skew the results.  According to the latest survey I have from the folks at The Economist, Bob’s German visitor spends about fifteen cents more for a Big Mac there than we do here.  By that measure our dollar is worth more than her euro.

If you are curious as to who spends the most to enjoy such a delicious gourmet treat, as of last July when this survey was released, it was Norway.  Interestingly, Russians were spending substantially less then, suggesting their ruble was more valuable than our dollar.  Since then the ruble has lost a substantial amount of value so I’m not sure what a babushka would pay today, if she could buy one.  I understand Vladimir closed down McDonald’s local eateries as pay-back for recent sanctions imposed on Russia.  I wonder who suffers the most from that?     (by J R)