The Big Mac Index.

They’re big, unhealthy and most importantly they are available world wide. In fact, the Big Mac is sold in over one hundred countries. This widespread availability is why economists find them fascinating. No, it’s not their flavour or value for money, it is their ability to tell a story about the world from the consumer’s perspective.

The Big Mac Index was the brainchild of Pam Woodall, first coined in the 1980s during her time at The Economist magazine. Forty years later, this quirky idea still holds relevance, with the results of the index published annually. In short, the Big Mac index shows how burger prices differ across international borders. It completely changed the way we look at currencies. More importantly, it demonstrates just how well off consumers are in each country.

To understand the Big Mac index, you need to understand that the dollar in your pocket does not exist in isolation. Currencies exist in pairs. Most commonly in a pair with the United States Dollar. Everything is often compared to the American dollar, highlighting its central role in the global economy.

In an ideal world, exchange rates would accurately reflect trade dynamics. The value of a currency would depend on how much it is desired compared to another. How much one dollar is wanted compared to the other. That is how the system is meant to work. If people want American dollars more than Australian dollars, the American dollar would appreciate in value. This leads to the famous idea that over time through the law of averages, prices across the world should smooth out. That everything in one country would cost the same equivalent in another country. Essentially, after adjusting for exchange rates, products should have the same price in different countries.

Sneakers provide a good example. If a pair of sneakers were one hundred dollars in the USA, then they should be the equivalent of one hundred USD here in Australia. At the time of writing this, that would be roughly one hundred and fifty dollars AUD. However, every sneakerhead knows this is rarely the case. In fact, most consumer goods are cheaper in America, even when we adjust for the exchange rate.

This discrepancy presented economists with a problem. If sneakers cost Australians three hundred dollars, what was happening? It is clear that consumers were better off in some regions and worse off in others. Deliver the Big Mac.

Perhaps the most famous burger in the world, the Big Mac, offers a unique advantage for economic comparison. Unlike sneakers, which vary greatly in type and price across countries, the Big Mac is remarkably consistent. It fits the mold perfectly. It is readily available in almost every country, with the same raw ingredients, marketing, and packaging. It is easily recognizable and simple to record. In fact, a quick Google search will give you the raw data almost instantly.

Let’s say a Big Mac is two dollars in America and an exchange rate is a straightforward one point five. If everything were perfect and everyone paid the same for the burger, Australians would pay three dollars. Any other price tells you if consumers are better or worse off. If Australians only paid one dollar, they would be better off than Americans. If they were paying four dollars, they would be worse off. This simple concept has revolutionized the way we measure economies around the world. How much more or how much less someone pays for the same burger indicates whether they will pay more or less across the entire economy.

It comes as no surprise that the latest Big Mac Index (2024) shows consumers in Switzerland and Norway are far better off than most of the world. Australia has experienced a considerable dip in its standard of living this past year, so it is not surprising that Australian consumers were worse off than Americans this year. South Korea and Hong Kong are also worse off yet again

Why even bother tallying up the price of burgers each year? Over time, the assumption that prices would equalize for consumers worldwide has proven unreliable. Despite it being easier than ever to transact globally, international commerce still lags behind.

Of course, there are obvious factors causing these price discrepancies. Taxes on imports and government policies all significantly influence pricing—just look at the global car industry as an example! Petrol could not possibly be the same price across borders when each government taxes it differently. These make sense and at least for the time being consumers are going to have to cop that reality.

There are also less obvious reasons why consumers are worse off in certain countries. For instance, while sneakers might be more affordably priced in America, it’s impractical for someone from Melbourne to fly twenty-three hours just to go shoe shopping. The idea that prices will smooth over time probably doesn’t take into account just how impractical that may be for everyone.

Younger e-commerce brands treat consumers much better when it comes to price uniformity. If you’re willing to pay for international shipping, you’ll likely pay the same equivalent price regardless of your location.In contrast, legacy brands—established before 2013—often maintain separate websites for each country, resulting in price discrepancies that disadvantage non-American consumers. These brands operate almost as separate entities, maximizing profits to send back to America. For instance, the renowned swoosh running brand charges Australians significantly more for shoes than Americans pay. Yet your favorite streetwear brand that is e-com only will ship it to you anywhere in the world for the same price regardless of where you are.

The unfortunate reality is that these large companies often engage in questionable pricing practices without facing significant consequences. For consumers who cannot afford to fly to the United States for shopping, there are limited alternatives. Australia, in particular, has struggled to develop its own major brands and heavily relies on American and British companies for the latest sneakers, handbags, and clothing. A visit to a large shopping center reveals crowds of teenagers eagerly seeking the latest fashion from these American retailers. Australian stores are noticeably scarce, and those that exist tend to be perceived as budget options rather than trend-setting brands.

That is why the Big Mac is so important to international finance. That one burger keeps track of how much the consumer is getting screwed in each and every country.

A quick note on the article: the examples where numbers are used are just examples and do not represent the actual index. For the sake of simplicity i kept the numbers basic rather than using complicated mathematics to demonstrate the point.

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