Greener Desktop

I’ve long been a follower of the Big Mac Index and its poorer (or is that funnier?) cousins like the iPod index. It’s used as a measurement of the Purchasing Power Parity (PPP) of various nations around the world and involves taking the current price of a Big Mac in around 120 countries, a product that should theoretically cost the same everywhere and converting its price to US dollars. What you’ll find is far from parity. Some currencies appear over valued and others under valued. For example the Australian dollar appears to be vastly under valued simply because of the fact that a Big Mac in Australia is a lot cheaper than in the US. Likewise the Euro is overvalued because the average burger there is more expensive there than in the states.

So what I hear you ask. Exactly. The Big Mac index is a quick, simple and very dirty economic indicator. It’s not really meant to be taken too seriously, even the Economist magazine. The inventors of this index admit so. It’s flawed in many ways. The most obvious is the once a year snapshot. For example - last year in Australia a Big Mac cost the same as this year but one important thing was different. The Australian dollar (AUD) was worth almost one US dollar (USD). This year at the time the snapshot was taken it was only worth 70 cents. What does that mean? It makes the AUD look a whole heap more undervalued than it is at any one point in time.

It is further flawed by the fact that in some countries a Big Mac is a commodity item. Eg Australia, US and the UK. In fact most western nations and in other countries it’s a luxury. Hence a burger will be more expensive relative to income in the latter countries. In Brazil a Big Mac is 7.50 Reais (yes that’s the currency) yet the average annual income for a worker in Brazil is only 10,200 Reais. In Australia on the other hand a Big Mac is 3.75 AUD and the average income 57,000 AUD per annum. So an Australian can afford to buy fifteen thousand Big Macs a year whereas your average Brazilian can only buy just over thirteen hundred. Obviously a luxury food item in Brazil.

Don’t get me wrong. I love the index and all its imitators but there needs to be a more comprehensive index completed. One that takes into account the fact that a beer and a pack of cigarettes in Australia costs ten times as much as it does in Brazil and probably 2 to 3 times that of the US. That a bag of rice costs just cents in India. The undertaking would be massive but with the power of social networks and the internet I think it could be done.

This week sees me embarking on the beginnings of this project. It won’t be the full thing it’s just a small site that asks how much different things cost in different parts of the world. Great for people budgeting for holidays and complaining of being ripped off in Morocco. However, it’s the start of what I think could become a digital Mecca for the Global Economists.

Foot note: If any of this bizarre economics rant interests you then I implore you to read the book Freakonomics. It applies economic theory to things as bizarre as choosing names through to if drug dealers make so much money, why do they still live with their mums.  There’s even a Freakonomics blog. I can’t wait for the second edition of the book.

Update: I’ve been corrected by a thoughtful reader on the correct usage of the Brazilian currency. The plural of Real is Reais. Being married to a Brazilian I should know this and have no excuse to plead ignorant.

Related posts:

1. Why Australia will remain in the digital dark ages for some time to come