## The Big Mac economy

Complexity level:
9
Project cost (\$):
10
Time required:
1 day to prepare, 2 days for the science project experiment
Material availability:
Safety concerns:

NA

### Abstract

This survey was done to discover the relationship between the price of a Big Mac hamburger and the GDP per capita of a country.

### Hypothesis

As the GDP per capita of the country increases, the price of the Big Mac also increases.

### Background

Big Mac Index

The Big Mac is a standard burger that is sold in all Macdonald’s franchise restaurants across the world at different prices. The prices seem to be adjusted to suit the affordability of the local consumers (amongst other factors) in a particular country.

Theoretically, since the price of a Big Mac has been fixed based on affordability, demand and supply, it may perhaps, to a certain extent be used to compare and justify the currency exchange rate between 2 countries. For example:

The Big Mac is priced in the USA atUS\$2.90, The Big Mac’s price in Thailand = Baht 70

Purchasing Power Parity (PPP) = US\$2.90/ 70 = 0.0414

Currency exchange rate: 0.0327 US\$ = Baht 1 (estimated)

To calculate whether the Thai Baht is undervalued or not against the US dollar:

(0.0327 – 0.0414)/0.0327 x 100% = -26.6%

A negative figure means that the Baht is theoretically undervalued against the US dollar (in this case, by 26.6%).

### Scientific Terms

GDP, per capita, foreign exchange rates

### Materials

The materials and information required for this science project:
- GDP per capita of various countries
- Price of Big Mac in various countries
- A computer to help analyze the data

### Procedure

1. A list of 10 countries will  be used  for the survey. To simplify the analysis, the selection of the countries will be made based on the GDP per capita, so that the result will reflect a broad range of poor  and rich countries.

2. Research the GDP per capita for various countries on the internet. Once the figures are obtained, the 10 countries are selected and they are recorded in the table below.

3. The price of the Big Mac burger in each of the countries is next searched for on the internet. The result of the search are also recorded in the table below.

4. Based on the data, the first chart is created to compare the ratio of GDP per capita to the price of the Big Mac in each country. To do this the GDP per capita is converted to per unit of US\$10K. The chart is then plotted with the GDP per capita figures and Big Mac prices, side by side for each country, as shown in chart 1.

5. The second chart is created to observe how the price of the Big Mac will change against the increasing GDP of various countries. The data for the countries is arranged along the X-axis with increasing GDP as shown in chart 2. The price of the Big Mac for each country is then plotted.

6. The data and the charts are now ready for analysis.

### Observation

The finding , shown  in  chart 1, is that in  countries  with  a GDP per capita income  that is less than US\$25K, typically the price of the Big Mac is greater, than the GDP per capita income, per US\$10K. For the countries with a higher GDP per capita, the price of the Big Mac is less  than the GDP per capita income, per US\$10K. The only exception is Switzerland.

Chart 2 shows that increasing the GDP per capita income does not have much influence on the Big Mac selling price in the particular country.

 Country GDP per capita income (US\$) Price of Big Mac (US\$) China 5,962 1.26 South Africa 10,109 1.86 Malaysia 14,215 1.33 Hungary 19,329 2.52 Czech Republic 24,712 2.13 New Zealand 27,027 2.65 Australia 35,677 2.27 Switzerland 42,534 4.90 USA 46,716 2.90 Singapore 49,288 1.92

The charts below help us visualize the data in our table.

Chart 1- Comparing Big Mac prices (US\$) to per capita income (US\$10k) of different countries

Chart 2 – The changes in Big Mac prices as the GDP per capita increases

### Conclusion

Our hypothesis has not been proven to be true. As the GDP per capita of the country increases, the price of the Big Mac does not necessarily increase.

The currencies of some countries are undervalued or overvalued due to foreign exchange trading. The Big Mac Index was created to test the exchange rates in an informal way, by comparing the buying power of consumers in different countries using the Purchasing Power Parity (PPP).

### Also consider

The project can be repeated by comparing prices of other international food chains like Pizza Hut or Burger King.

Try to repeat the project to compare prices for countries within Asia and countries within Europe.

### References

Big Mac index - http://en.wikipedia.org/wiki/Big_Mac_Index

Food for thought – the Big Mac Index - http://www.cfo.com/article.cfm/3014203?f=home_todayinfinance