September 7th, 2009
06:02 AM GMT
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You know how it is –- you’re in a strange city, maybe a strange country, tired, hungry, missing home, it's kind of late. You walk into that little (in my case, Chinese restaurant), there are teeth marks on the chopsticks, the floor is kind of sticky, and on the menu is the house specialty: rabbit face. Not quite what you wanted, but as luck would have it, just down the road you can see it in the distance – the golden arches, sitting high and proud calling to you.

OK, this might be (in my case) China, but you know that somehow, once you walk through those doors, there on the menu will be a cheeseburger, a Big Mac, Quarter Pounder and fries. And for the most part the food will taste pretty much like the Mickey Dee’s on Santa Monica not far from my old apartment in LA.

So, when I buy my Big Mac here in China, it’s just over 12 RMB, or $1.76. When I buy a Big Mac in L.A. it costs around $3.50. The great thing about a Big Mac as far as economists are concerned (wel, the ones at “The Economist” magazine, anyway) is that it's pretty much the same wherever you go . . . two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun.

And that means for economists it’s a great way to compare currencies. Much like the Big Mac itself, it’s not perfect – wages, rents and other costs vary, as well as the size (I have noticed the Chinese burgers a little on the small side). But for more than 20 years the people at “The Economist” have been doing this exchange rate comparison, and – surprise, surprise – they found Asian currencies under-valued, European over-valued.

In the case of China, by about 40 percent undervalued – this is at the far end of the spectrum as far as many critics in the U.S. are concerned. They accuse Beijing of deliberately manipulating the currency, keeping it undervalued. That means exports from China are a lot cheaper, giving exporters here an unfair competitive advantage, they claim.

Imagine if you could go to that McDonald’s in L.A. and instead of paying $3.50 or so for the American Big Mac, you could pay $1.76 for the Chinese version, knowing the ingredients are the same.



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soundoff (14 Responses)
  1. Nik

    Too bad I live in ghana, there is no mcdonalds here

    September 7, 2009 at 9:01 am |
  2. Joe

    Source please for deliberately undervaluing the currency.

    It is not easy for a government to undervalue a currency as prices are a function of supply and demand. If the burgers are priced too low, that would mean that demand would exceed supply and McDonalds would run out of hamburger.

    If controling price inflation was so easy for a government, all Ben Bernanke would have to do was wave his magic wand and Walla! we have price stability!

    September 7, 2009 at 7:27 pm |
  3. Eric

    You guys are smart enough.

    September 8, 2009 at 5:12 am |
  4. Mike

    Guess what? China "deliberately... keeping it undervalued" vs. the US dollar is the flip side of a strong US dollar. Anybody who worries about the future weakness of the US dollar is in a very weird position if he calls upon the Chinese to allow its currency to appreciate vs. the USD.

    Ah, if only there were some way to get the Chinese to stop keeping the renminbi "undervalued"... and at the same time not do anything to make the USD lose value against another major currency.

    What do y'all want? A stronger dollar vs. other currencies... or a stronger other currency vs. the dollar?

    September 10, 2009 at 7:50 am |
  5. John

    While there is a big difference comparing China to the US, try to compare the countries in the EU.

    You'll be surprised to find the difference in the cost of a Big Mac in various EU countries. And the irony of it all, you are paying for the Big Mac in the same currency – Euro.

    September 10, 2009 at 1:37 pm |
  6. Gino

    I've been reading about this so called "Big Mac Theory" for years and after traveling extensively throughout the US, Europe, Japan, Taiwan and China I still have the same opinion I had about it when I first read it: it's BS.
    Not even WITHIN the US Big Macs cost the same everywhere. Hey, like John says not even in the European Union. And the worst part is that in some Latin American countries policy makers have yielded this so called "theory" as a reason to devaluate national currencies with the subsequent havoc this creates.

    September 11, 2009 at 2:18 pm |
  7. requiredreading

    Perhaps the price is also a function of the value the product has for the people in that country. Most likely the Big Mac has a greater value for Americans, because that is their "home" food. Perhaps the Chinese prefer rabbit face.... In Europe a lot of people still object to McDonald's with a projected image of it as "cheap, unhealthy, fattening, uncultured, American (in the negative sense)" and would therefore prefer the pizza. Unless your kids like the added attraction of the ball room IKEA style...

    September 12, 2009 at 9:23 pm |
  8. Elke, Germany

    John is right. I´ve been in many European countries, but it was never the same price for a burger, even in neighbouring countries with the same standard of living.

    September 13, 2009 at 5:40 pm |
  9. labrea2

    China's per capita income is about $4,900, while the US is about $40,000 . So, while at $3.50 a burger may seem twice as expensive in the US, in fact, even at one-half the cost, at $1.76, it's almost five times more more expensive for the Chinese- on average.
    And yes, China's totalitarian regime artificially controls the yuan's value in order to keep its exports cheap and control market share and amass foreign exchange reserves (forex), now totaling in excess of two trillion dollars. It's using this huge forex warchest to buy friendship and influence, but more importantly, corralling natural resources around the world.

    September 17, 2009 at 8:34 pm |
  10. Pedro

    OH WELL! LIKE ANY GOOD AMERICAN CO. AND WALL ST. CHINA IS DOING BUSINESS FOR THE PEOPLE, FOR PROFIT, TAKING ADVANTAGE OF ANYTHING THEY FIND TO GET BUSINESS GOING AND TO KEEP THE PEOPLE WORKING. THEY MAY SEEM TO HAVE AN ADVANTAGE AND LIKE A US COMPANY THEY ARE USING IT!!! IS A DOG DOG WORLD!!! BY THE WAY I AM AMERICAN AND I TRY IF ALL POSSIBLE TO BUY AMERICAN PRODUCTS TO KEEP AMERICAN MANUFACTURERS GOING! BUT, I BELIEVE THE ISSUE IS MORE THAN JUST CURRENCY OR SUPPLY AND DEMAND. I BELIEVE THE ISSUE IS HOW COUNTRIES DO BUSINESS WITH EACH OTHER. HOW THE GLOBAL ECONOMIES INTERACT WITH EACH OTHER AND MOSTLY HOW THE PEOPLES OF THE WORLD DEAL WITH PRE -FABRICATED NOTIONS AND OLD SYSTEMS ESTABLISHED BY PEOPLE, THAT IS IN SERIOUS NEED OF AN OVERHAUL WITH FRESH IDEAS AND A NEW SYSTEM...

    September 23, 2009 at 3:26 pm |
  11. Pedro

    AGAIN, CORRALLING NATURAL RESOURCES, IT SEEMS TO ME CHINA IS DOING WHAT IT NEEDS TO DO. REMEMBER IN THE PAST WHEN SOME COUNTRIES NEEDED RESOURCES THEY WENT TO WAR TO GET THEM! THEY ARE SAVVY THEY ARE BUYING THEM. I HAVE BEEN FOLLOWING SOME OF CHINA'S BUSINESS AND POLITICAL STRATEGY TO POSITION ITSELF IN A VERY COMPETITIVE WORLD POSITION. P. . S REMEMBER WHO IS LENDING BILLIONS TO THE U.S. WE ARE ENTANGLE IN A WEB MOSTLY FINANCIAL. IT IS A PRACTICAL RELATIONSHIP. WE MAY NOT AGREE IN POLICY,POLITICS,HUMAN RIGHTS ETC, BUT WE AGREE ON TRYING TO KEEP STABILITY IN THE WORLD THAT PEACE IS BETTER THAN WAR. EXAMPLE, EVEN WITHIN THE FAMILY WE HAVE DISAGREEMENT !!

    September 23, 2009 at 4:14 pm |
  12. Moya

    If you EVER studied currency, you would know that the yuan is under-valued. A floating peg- total oxymoron.

    October 9, 2009 at 3:54 pm |
  13. BuleDodol

    Lucky if you ended-up in a place like China, where you still could find restaurants.. If u stuck in papua new guinea for instance, i think you ought to hunt some boars to eat.. LOL...

    Honestly, i think Chinese restaurants are quite decent (even the locals) .. I never had a bad stomach problems like in India.. Anyway, talking about big mac prices.. do you know the cost of beef or other meats in China? Their cost just a fraction from in the States or any other western countries.. why?? because their living costs are cheap.. that's why..

    So, the price of big mac in China is cheaper than in the States eventhough they're all from the same ingredients..

    October 24, 2009 at 9:44 am |
  14. mary

    this may be quite surprising but...i would just not pay the same price for a big mac i do in the US as in china because chinese mcdonald burgers are actually noticeably smaller in size. relative earning as well as minimum wage is lower making things like mcdonald and KFC almost close to middle-class food instead of the american definition of low-class fast food in china and sometimes it's even considered a luxury. if you really believe that the big mac index is still valid then take a look at Iceland, the last Mcdonald just closed down there.

    November 11, 2009 at 9:24 am |

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