Dr. Mark Nan Tu

Big Mac Index is a Burgernomics is based on the theory of PPP purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. Thus a McDonald’s Big Mac, which is produced in about 120 countries, should cost the same.

Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

Using 2007 Economist Big Mac Index. US is – US 3.22
The five most expensive countries:
Iceland – US 7.44
Norway – US 6.63
Reunion Island – US 6.23
Switzerland – US 5.05
Denmark – US 4.84
The five least expensive countries:
India – US 1.40
China – US 1.41
Hong Kong – US 1.54
Malaysia – US 1.57
Venezuela – US 1.58
Egypt – US 1.60

This means that the value of the Chinese Yuan is 56% undervalued when compared to the price of a hamburger in the USA. In other words, instead of 1USD = 7.3RMB (in 2007 when the Economist published the Big Mac Index), 1USD should really be 4.01RMB.

Big Mac Index does not take into account the labor cost, (which in China is a lot cheaper than the US), the store rent, the perceived brand of Macdonald, etc. A big Mac meal is considered as cheap fast food in the US. It is considered as the expensive meal in China and only offered to kids which exceptional performance such as scored 100 points in exams. There is also possibilities that Macdonald is sourcing the materials in China thus reduces the material cost.

In 2004?The Economist published a Starbucks Tall Latte Index. The index shows how many lattes (as opposed to Big Macs) U.S. dollars buy in a given country when exchanged for the local currency.

US -US 2.80
Switzerland – US 4.54
European Union – US 3.72
Hong Kong – US 2.22
China – US 2.77
Australia – US 2.69
Canada

Looking good does not have to be expensive

Most of the people will laugh at me when I tell them that a BMW can be cheaper than a QQ. A BMW 320 made by Huachen BMW in China is sold at around 300,000 RMB. A QQ made in China is sold at 50,000 RMB. So how is a BMW cheaper than a QQ?

Well, if you pay in full price and brought all of them new, BMW is definitely more expensive than a QQ. However, if you get a near used (but near new BMW), it can be cheaper than a new QQ. In Chinese used car market, a 2 year old used BMW320 is around 200,000RMB.

Let us assume that today, you buy a BMW320 at primer condition (as good as new) at the market price of 200,000RMB. A new QQ is sold at 50,000RMB, with all the sales taxes, etc, the new QQ will set you back for 60,000RMB.

One year from today, the BMW is worth around 195,000RMB. The QQ is worth 40,000RMB. Let us do the math here.
Assume 6% interest rate and 0.5% per month.