Burgernomics: What It Means, How It Works

What Is Burgernomics?

Burgernomics, popularized by the Economist's Big Mac Index, is the idea of using the iconic fast-food Big Mac to illustrate purchasing power parity (PPP). Using the cost of a McDonald's Big Mac as the price benchmark can show how to compare the buying power of different currencies. While initially quite tongue-in-cheek, it's still around for its ability to show the over- or undervaluation of specific currencies compared with the U.S. dollar.

Breaking Down Burgernomics

The Economist says it meant the Big Mac Index to be “a lighthearted guide to whether currencies are at their ‘correct’ level.” Regarding PPP, foreign exchange rates should adjust to equalize the price of goods and services across different nations. According to the magazine, the Big Mac PPP denotes the exchange rate at which the famous McDonald’s hamburger would cost if it were the same in the U.S. as in other countries.

Some countries require some creative approaches to the Big Mac, with its “two all-beef patties, special sauce, lettuce, cheese,” etc. As economists Michael Pakko and Patricia Pollard explain, in India, where McDonald’s does not sell beef, consumers buy the “Maharaja Mac,” made with chicken patties. So India “is not included in the Big Mac survey.” They also note that in Islamic countries and Israel, the Big Mac is made with halal and kosher beef, respectively, though the addition of cheese makes it non-kosher. “Although it is possible to purchase a Big Mac in a kosher McDonald’s, the lack of cheese would exclude it from the survey.”

Burgernomics Example

The Big Mac Index offers a quick way to gauge the value of two currencies and whether the market is over- or undervaluing a currency.

For example, in December 2023, a Big Mac cost $5.69 in the U.S. and DKr39 in Denmark. The exchange rate at the time was 6.85 DKr to USD. Because $5.69 converted to DKr39 at the time, the currencies were fairly valued against each other.

By contrast, the cost of a Big Mac in Switzerland was SFr7.10. This implies an exchange rate of 1.25 USD to SFR, but the actual exchange rate was 0.87 USD to SFR, meaning that the Swiss franc was significantly overvalued compared with the dollar.

Burgernomics Today

In the U.S., Big Mac sales have waned since the 1980s as tastes change and consumers seek other healthier options. Nevertheless, the index has remained a benchmark.

A 1997 article in the Journal of International Money and Finance noted that the Big Mac makes sense as an international monetary standard, given that it's produced locally in more than 111 countries worldwide, with only slight variations in the recipe. For that reason, it's almost "the perfect universal commodity."

That said, The Economist has adjusted its approach to Burgernomics. In August 2023, the magazine noted that the Big Mac Index "was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible."

Still, their experts there have now calculated "a gourmet version of the index," which addresses a criticism that average burger prices could be expected to be cheaper in countries with lower labor costs.

"PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today's equilibrium rate," according to The Economist. "The relationship between prices and GDP [gross domestic product] per person may be a better guide to the current fair value of a currency." "The adjusted index uses the 'line of best fit' between Big Mac prices and GDP per person for 48 countries (plus the euro area)." The magazine said it "gives a supersized measure of currency under- and over-valuation."

The Bottom Line

The Big Mac Index was designed to give everyday people and investors a simpler, fun way to compare the values of currencies using the price of a product everyone understands: a cheeseburger. The index is still used among economists, political commentators, and others for the amusing way it breaks down a complex economic idea to explain how currencies relate to one another and whether one is over or under-valued in relation to the other.