Is The Big Mac Index Obsolete?
Japan's Nomura company thinks technology prices tell us more about currency comparisons than fast food.
PARIS — A Japanese financial firm says it's high time to replace the now famous "Big Mac index," introduced 30 years ago by the London-based magazine The Economist, with something that better fits our digital era: an "iPhone index."
The logic behind the proposal, put forth by the company Nomura, is that consumers today are more likely to cross borders to find a cheaper iPhone than they are to buy a better priced McDonald's burger.
Both indices compare currencies on the basis of purchasing power parity (PPP), and are tools allowing economists and consumers alike to see which currencies are overvalued and which are undervalued.
The scales work by comparing the different prices in each country of a good that is uniformly sold and produced across the globe — one as ubiquitous as a McDonald's Big Mac or an Apple iPhone — to discover the currency effect that determines the good's varying prices. A Big Mac, for example, is 1.3 times more expensive in Switzerland than it is in the United States, meaning the Swiss franc is 30.7% overvalued compared to the U.S. dollar.
Nomura researcher Bilal Hafeez, formerly the head of foreign exchange research at Deutsche Bank, says the iPhone, given what it demonstrates about currency effects on technological products, is now a better product for PPP comparison than the Big Mac.
When the Big Mac is exchanged with the iPhone as the product of reference, he explains, the rankings of how currencies are valued is completely turned on its head.
With the iPhone index, the most overvalued currencies compared to the U.S. dollar are the Brazilian real (60%), the Turkish lira (54%), and the Russian ruble (31%). The Big Mac index, in contrast, identifies the Swiss, Swedish, and Norwegian currencies as the world's most overvalued. Unlike its Big Mac counterpart, the iPhone index finds that every currency in the world is overvalued compared to the U.S. dollar, as Apple sells its iPhones cheapest in the United States.
So which one is the most accurate? The answer isn't entirely clear, since the two indices analyze different effects. The Big Mac index is heavily influenced by labor costs in each country and measures the effect those costs have on PPP. As such, it lists many emerging market currencies as undervalued. The iPhone index, on the other hand, reflects the quality of local infrastructure to produce high-tech and luxury goods, revealing a different set of comparisons.
The indices do agree on some points, and there are a few countries whose currencies are overvalued and expensive any way you look at them: Sweden and Norway. Looking for a cheap burger and a new phone? Try Mexico or Hong Kong.