India and the 'Hamburger Economics'

Is India really one of the cheapest nations to live in?

India could be one of the cheapest countries in the world to live but the size of a burger matters.

Going by the recently published ‘Big Mac’ index of The Economist newspaper, the cost of living in India could be on a par with developed countries, or much lower than Egypt, depending on which McDonald’s burger you fancy.

The Economist hasn’t yet given the comparison of India in their mails to subscribers, and it is not clear what burger price the weekly magazine-format newspaper assumes for India.

For example, in the January edition, it had assumed the burger price at Rs 100 each.'

However, going by the Foodpanda pages, a Chicken Maharaja Mac burger (equivalent to Big Mac) costs Rs 241, before tax.

At the prevailing exchange rate of 64.45 a dollar, this turns out to be $3.74 for one burger.

At this rate, India ranks higher than Japan ($3.36) and lower than Britain ($4.11), which also makes the Indian currency undervalued in terms of purchasing-power parity(PPP) basis by about 20 per cent.

However, if the burger price is taken at Rs 100, which is roughly the price of a small one available at the outlets, and not the Big Mac available worldwide, the dollar equivalent for a burger turns out to be only 1.55, at which the price would be much lower than Egypt ($1.75), and the currency would be 80 per cent undervalued on PPP basis.

This also makes India one of the cheapest countries in the world.

The Real Effective Exchange Rate published by the Reserve Bank of India shows the rupee is overvalued at 18 per cent compared with its 36 currency trading partners.

On a six-currency basis (includes major global currencies only), the rupee is overvalued only seven per cent.

And, this is also one major criticism of the Big Mac index.

But, let’s take the comparison in the casual spirit of how the index was created. It is still a good indicator of PPP.

When the index was created in 1986, mainstream economists scoffed at it.

The newspaper was, however, clear that it was a light-hearted take on currency comparison.

Now in its 31st year, the biannual index has found its place in the discussion papers of the International Monetary Fund and given birth to a casual approach of comparing currencies through an informal mnemonic called ‘Hamburger Economics’.

The idea behind the index is to gauge the PPP of different nations.

Simply put, how much money customers of different countries pay to buy a particular item or a basket of goods, whose price should remain relatively stable across nations.

The Economist took into account the price of a Big Mac burger, of the McDonald’s restaurant, for the newspaper’s light-hearted take on the subject.

Big Mac is used because it is the standard offering of the restaurant chain, even as there are other numerous products that vary widely, based on popular taste in a country.

This is roughly how the index is calculated. If a burger in the US costs $5 and in Europe €8, the ideal exchange rate for the same PPP should be €1.6 for one dollar (8/5).

However, if the exchange rate in reality turns out to be 2, it can be said that the Europeans are actually paying less in dollar equivalent to buy the same burger than what their counterparts in the US enjoy.

In this case, Europeans should pay €10 for the burger, but they are paying €8.

Similarly, the vice versa would suggest that Europe is costlier (overvalued on PPP basis) than the US, at least when it comes to basic food like burgers.

In the July 2017 edition of the Big Mac index, The Economist sees the euro as 20 per cent undervalued.

While the average price of a burger in US is $5.3, in the euro area it is $4.47 equivalent.

Photograph: Stefano Rellandini/Reuters