2010 Big Mac Index | Increased differences between Baku and Tbilisi

In 2007 we wrote a blog post on the Big Mac Index, an index published by The Economist as an informal way of measuring purchasing power parity (PPP). The idea is that a dollar should buy you the same amount in all countries, and as a Big Mac is assumed to be produced in the same way everywhere it can serve as a point of comparison. You can thus determine how far off the exchange rate is between countries, in terms of citizens’ ability to buy the same “basket” of goods and services (in this case a Big Mac hamburger).

Back in 2007 a Big Mac cost 4.60 GEL (lari) in Georgia (which at the time was equal to 2.60 USD) and 2.50 AZN (amat) in Azerbaijan (2.73 USD). The price was thus similar in the two countries, and, according to the 2006 Big Mac Index, comparable to Hungary and Mexico. The same year, one had to pay 3.15 USD for the burger in the U.S. The only former Soviet country on The Economist’s list was Russia, and it placed much further down with the cost for a Big Mac equaling 1.6 USD.

Three years on a striking difference in price is now apparent. McDonalds is still not established in Armenia but a comparison can be made between Azerbaijan and Georgia and the rest of the world. As of March 2010, the price for a Big Mac in Georgia is 5.50 GEL, which according to the current exchange rate equals 3.2 USD. The price has therefore risen by almost 20 percent but at the same time the USD has gotten weaker in comparison with the GEL. According to the 2010 index, Georgia places between South Korea and Britain, relatively close to the U.S. at 3.58 USD. Without making any attempts to evaluate the strength of the lari in comparison to the USD, the Big Mac Index shows that the Georgian currency is somewhat undervalued.

In Azerbaijan, by contrast, the price for a Big Mac today is as much as 3.2 AZN, which equals 3.98 USD, a 28 percent increase from 2007. The huge increase in price means that a Big Mac in Azerbaijan is now more expensive than in the U.S., placing Azerbaijan on the same place as Australia, according to the index, indicating that the amat went from being slightly undervalued in comparison with the USD in 2007 to being overvalued today.

	2010	2006
Switzerland	6.16	4.93
Euro Area	4.62	3.51
Canada	4.06	3.01
Azerbaijan	3.98	2.73
Australia	3.98	2.44
Hungary	3.85	2.71
Turkey	3.71	3.07
United States	3.58	3.15
Japan	3.54	2.19
Britain	3.48	3.32
Georgia	3.2	2.6
South Korea	3	2.56
Poland	2.86	2.09
Mexico	2.56	2.66
South Africa	2.44	2.29
Russia	2.39	1.6
Egypt	2.37	1.61
Taiwan	2.36	2.35
Indonesia	2.28	1.54
Thailand	2.16	1.51
Malaysia	2.12	1.47
China	1.83	1.3

*Note that the numbers for Azerbaijan and Georgia are from 2007.

The price difference between Baku and Tbilisi was only 13 cents in 2007 but today is as much as 1.03 USD. Differences between the two countries have thus grown immensely in only three years. Russia is still in the lower part of the list with the cost for Big Mac being 2.34 USD. China is at the very last place of The Economist’s rating, indicating that the RMB (yuang) is greatly undervalued in comparison with the USD.

Comparing the currencies in the South Caucasus with the starting point in a McDonalds product might not be suitable for several reasons (e.g. there are few McDonalds restaurants in the Caucasus compared to other countries). The International School of Economics in Tbilisi (ISET) has recognized this and created their own index: the “Khachapuri Index”. It is based on the Big Mac Index but with the main purpose to measure inflation. Have a look at here.

Comments and comparisons to other purchasing power indices are welcome!

(Incomplete) BigMac Index for the Caucasus

When comparing iPod pricing across the South Caucasus, we promised more information on the Big Mac index. As described then, the Big Mac index has been suggested by the Economist as a measure of purchasing power parity. The argument is that Big Macs across countries bundle identical products and services, and therefore can serve as a comparable basket.

Unfortunately, the comparison is incomplete: no McDonald's yet in Yerevan (with various explanations offered, including that the region is served through Turkey). That may lend some credence to the Golden Arches Theory of Conflict Prevention, which suggests that countries that have McDonald's are less likely to be in conflict with each other, because they are in the same globalized orbit. (But this theory happens to be dubious, so Ron MacDonald is not yet standing in line for the Nobel Peace Prize.)

How do Georgia and Azerbaijan compare? In Azerbaijan, a Big Mac goes for 2.5 New Azerbaijani Manat, which currently puts it at 2.73 US dollars. At 4.60 GEL, the Georgian Big Mac is at 2.60 USD, 13 Cents less.

Comparing this with the 2006 Big Mac Index (admittedly one that looks forward to an update), the Caucasus is between Hungary (2.90) and Mexico/South Korea (2.63). If you believe the theory behind the index, the Caucasus is sort of close to purchasing power parity, since the American Big Mac costs $3.10.

By comparison, the Euro-BigMac is at 3.86 USD, the Swiss at 5.10, but the Chinese Yen, radically undervalued, at 1.30. Strikingly, the Russian Big Mac is a lot cheaper and goes for 1.83 USD, and the Ukrainian is in the same league at 1.88 dollars.

As with the iPod, pricing may be driven by maximising the margins, not by the actual basket. MacDonald's in both countries is an upmarket product. In Russia and Ukraine it plays to the mass market and is priced accordingly.

Scale will also play a role: with few restaurants in the Caucasus, McDonald's does not enjoy the advantages of scale. On that level, the index underlines that the local cost of doing business still is higher than it will be in Poland, Ukraine, Russia or Hungary.

Comments welcome.