This is McDonald's first sale decline reported in13 quarters. Defining: The Big Mac Index
McDonald's missed their earnings expectations, according to the Q2 earnings report. This is concering to some economists because traditionally, on a macro level, "The Big Mac Index" has been a gage of consumer behavior and how consumers are ultimately doing. Along with other currency implications. Not just in America, but globally.
So what is the Big Mac Index?
"Twice a year the Economist converts the average national price of a Big Mac into U.S. dollars using the exchange rate at that point in time. As a Big Mac is a completely standardized product across the world, the argument goes that it should have the same relative cost in every country. Differences in the cost of a Big Mac expressed as U.S. dollars therefore reflect differences in the purchasing power of each currency." It has become accepted as a fairly reliable "currency parity indicator for developed, developing, and non-developed countries (as long as Big Macs are sold there).
The Economist website shows the index in 54 countries. See below for the entire list of countries.
"The Big Mac index is a survey created by The Economist magazine in 1986. Purchasing power parity is an economic theory that states that exchange rates over time should move toward equality across national borders in the price charged for an identical basket of goods. In this case, the basket of goods is a Big Mac. An American basket of groceries and a Japanese basket of groceries will likely contain very different products. However, a Big Mac, though, is always a Big Mac." (Investopedia)
Taking a deeper look: Missing expected earnings was significant for the fast food juggernaut, because it marks the first sale decline reported in 13 quarters. So the bigger picture tells you, besides the earnings, that there is a concern about consumer spending. Not just here in America but worldwide as well.
It tells you consumers do not want to spend in this current economy. It points to a slow down. McDonalds is taking steps to lower it's prices because things are too expensive and consumers are pulling back. These could also be the first steps into a recession, too.
FAQ: Is the Big Mac Index a Good Indicator of Inflation?
"The costs of raw materials, labor, transportation, taxes, and others are priced into Big Macs, so it is safe to say that the price of a Big Mac can reflect inflationary pressures."
You can use the price of Big Mac's to see if a currency's exchange rate is over or undervalued.
This is done by taking the local price of a Big Mac (in local currency) and dividing it by the U.S. price of a Big Mac to calculate an implied exchange rate.
"This implied exchange rate is then compared against the actual exchange rate between the two currencies; if the implied rate is higher than the actual rate, the local currency is overvalued, and if it is lower, the local currency is undervalued."
Take a look at this Dataset from over 50 countries:
Country | Price of Big Mac in USD | Big Mac Index (USD) |
Switzerland | $8.17 | 43.53% |
Norway | $7.14 | 25.47% |
Uruguay | $7.04 | 23.72% |
Euro area | $5.87 | 3.12% |
Sweden | $5.87 | 3.08% |
Costa Rica | $5.71 | 0.39% |
Britain | $5.71 | 0.36% |
Denmark | $5.69 | 0.03% |
United States | $5.69 | 0.00% |
Sri Lanka | $5.69 | -0.03% |
Canada | $5.56 | -2.37% |
Mexico | $5.19 | -8.74% |
Colombia | $5.09 | -10.60% |
Australia | $5.07 | -10.82% |
Saudi Arabia | $5.07 | -10.97% |
New Zealand | $5.01 | -12.03% |
Poland | $4.97 | -12.74% |
Singapore | $4.96 | -12.88% |
Venezuela | $4.93 | -13.28% |
United Arab Emirates | $4.90 | -13.87% |
Brazil | $4.81 | -15.48% |
Lebanon | $4.80 | -15.56% |
Czech Republic | $4.61 | -18.97% |
Kuwait | $4.55 | -20.05% |
Israel | $4.52 | -20.63% |
Bahrain | $4.51 | -20.74% |
Chile | $4.46 | -21.68% |
Nicaragua | $4.34 | -23.70% |
Peru | $4.25 | -25.32% |
Honduras | $4.13 | -27.37% |
South Korea | $4.11 | -27.81% |
Hungary | $3.98 | -30.11% |
Turkey | $3.97 | -30.29% |
Qatar | $3.85 | -32.42% |
Argentina | $3.83 | -32.61% |
Pakistan | $3.81 | -33.09% |
Thailand | $3.78 | -33.50% |
Guatemala | $3.71 | -34.78% |
Oman | $3.69 | -35.18% |
Moldova | $3.56 | -37.45% |
Jordan | $3.53 | -38.03% |
Azerbaijan | $3.49 | -38.58% |
China | $3.47 | -38.99% |
Romania | $3.42 | -39.85% |
Japan | $3.04 | -46.51% |
Vietnam | $3.01 | -47.06% |
Hong Kong | $2.94 | -48.30% |
Ukraine | $2.94 | -48.37% |
Philippines | $2.86 | -49.74% |
Malaysia | $2.78 | -51.10% |
Egypt | $2.75 | -51.66% |
South Africa | $2.71 | -52.46% |
India | $2.59 | -54.51% |
Indonesia | $2.43 | -57.29% |
Taiwan | $2.39 | -57.95% |
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