How the Big Mac index works

From 2014 to 2016 there was a rapid growth of the dollar against the ruble - almost twice. Until now, many citizens of our country are facing the consequences of this phenomenon: rising prices, increasing interest on foreign currency loans, etc. But what does this have to do with? Devaluation, inflation, "tricks of the Americans", sanctions? Or maybe all this together? The answer is unclear. However, there is an alternative exchange rate - a valuation for a hamburger, or the so-called Big Mac Index. In what it is and whether our ruble is really "weak", as they say about it, we will try to sort it out.

The index of Big Mac: what is it?

For the first time the idea of valuing currencies according to the Big Mac was proposed by The Economist in Pam Woodall's article back in 1986. It was in her in a half-joking manner that the author estimated the real exchange rate with the help of a hamburger. Since then, this estimate is called the "Big Mac Index". He is still published in this magazine.

Is the Hamburger an ideal indicator?

The logical assessment of the real value of currencies was based on the fact that the famous hamburger from McDonald's is presented in many countries of the world. The restaurant is on almost every street in every city.

Why the Big Mac? The fact is that it contains a sufficient number of food products - bread, meat, cheese, vegetables. That is, the food minimum that a person needs for normal life.

Its cost depends on many factors:

• Amount of output;
• Rent;
• Raw materials;
• work force;
• Infrastructure, etc.

It is the versatility of the components of the hamburger, the wide geography of restaurants around the world that make it possible to understand the real exchange rate of national currencies.

Ruble underestimated?

To understand the fair dollar exchange rate for today, it is necessary to look at the Big Mac index. Russia on it is clearly underestimated.

According to the research, in July 2016, the Big Bag in Russia cost 2.05 dollars, and in the USA - 5.02. This means that the real exchange rate of the ruble is 25.79 as of July 2016, which is 59.3 percent higher than the official rate of the Central Bank of Russia.

Are we the only ones who were underestimated?

The index of the Big Mac indicates that the currencies of many developing countries are artificially undervalued. Who and for what purpose does this - remains a question. We offer a list of the most undervalued currencies in the world.

Big Mac Index: table

From the table it is clear that the rate of some world currencies is clearly understated.

The position of economists

Leading economists do not seriously consider the Big Mac index. All of them give the following arguments:

• The structure and culture of consumption in different countries are individual. For example, Eastern countries prefer traditional cuisine, with the appearance in Russia of a wide range of restaurants of Japanese cuisine, many have changed their diet of bigak and switched to sushi and rolls.
• The price level is greatly influenced by the level of wages in the country. The lower it is, the cheaper the hamburger. Let's agree that the exchange rate and the average earnings in the country have nothing in common.
• The price of a hamburger in McDonald's also depends on the competition in this or that country of the world. If, for example, there is a single restaurant in Moscow, as it was in the late 80's. The last century, and the queue in it - a few kilometers, the cost will be higher than if there are at least 5 more such cafes around.

The conclusion suggests one: the Big Mac index can not be a serious economic indicator for a real definition of the national currency.

What can be determined by a hamburger

But it is a mistake to believe that the Big Mac index is useless. The real value of the currency, he may not even show, although many would not agree with this. But, analyzing the price of a McDonald's hamburger, one can understand the standard of living in the country. It manifests itself in the following indicators:

• Consumer status of society.
• The real level of wages. The higher it is, the more expensive the hamburger.
• Premises for rent. The more developed the city or country in the trade plan, the rent of the premises will be more expensive.
• Developed competition.

On these indicators, of course, Big Mac may say a lot. Indeed, the higher the standard of living of citizens, the more expensive the hamburger is. The residents of the United States, Switzerland and the EU give the most to him. The least is Russia, Ukraine, India, and so on.

Conclusion

As a rule, the Big Mac index in Russia is liked by various journalists, bloggers, and some politicians with the sole purpose of deceiving the broad masses. Like, look, Russia is not such a backward country, our ruble exchange rate is seriously underestimated, this "damned Americans" with their Federal Reserve System do not allow us to develop.

But we have already said that, according to some researchers, the Big Mac index indicates a directly opposite trend. The lower it is, the worse the population of a given country lives: low salaries, weak consumer demand, etc.

But in addition, the real and nominal exchange rate is not an indicator of the well-being of the population. You can live in prosperity and with a high dollar exchange rate against the ruble and vice versa.