Big Mac Attack
The cost of a Big Mac can be a powerful tool in indicating the cost of living associated with specific geographic regions. I chose to analyze Switzerland once again. I was shocked while living there at the prices of meals at McDonald’s as well as with the price of other items. According to the table in our book the cost of a Big Mac in Switzerland is 6.50CHF or 5.60USD. Compared with the cost of a Big Mac in Malaysia, at 1.52USD the discrepancies in price are clearly illustrated.
This discrepancy goes against the purchasing power parity theory, which states that price levels in any two countries should be identical after converting prices into a common currency. PPP serves for the basis for theories of international price determination.
In fact, since 1986, The Economist, has published an annual article comparing the prices of Big Macs around the world. The article helps evaluate exchange rates on the basis of international price differences.
Due to lower prices you could buy two sandwiches in Malaysia for the price you buy one in the US, however, you wouldn’t import a Big Mac from Malaysia. The thing that makes this interesting is that the components of the Big Mac are traded in the world market, therefore the law of one price says it should cost the same to prepare a Big Mac in all markets. The reasons for the inflated prices are trade barriers such as transportation costs, trade restrictions such as tariffs and taxes.
Other costs that can affect price are rent and equipment and employee wages.
The evaluation of the cost of the Big Mac is important for many reasons. The components of a Big Mac are traded on the world market that would lead you to believe that prices around the world should be close to equal, supporting the theory of PPP. It is the other factors that illustrate why PPP fails, the transportation costs, the differences in cost of rent, equipment and employee wage, tariffs and