I’m using the Big Mac Index, and I see that in India, we have a “Maharaja Mac” costing Rs.99. This info can be found on: http://www.mcdonaldsindia.com/mencard_mathura.htm#meals . Let’s use the Maharaja Mac as being a perfect proxy for the Big Mac. We know intuitively that this is not such a bad approximation. In the USA, the Big Mac is $3.41, and the exchange rate is about Rs. 40:USD 1. The PPP for a Big Mac implies that the exchange rate should be Rs.99/USD3.41 = 29.03. Therefore, a dollar should *only* buy 29.03 Rs. worth of “stuff” in India, but in reality, it really buys 40. So the Rupee is overvalued by (40-29.03)/(40) = 28%. We can even be a little conservative, and assume that the Big Maharaja could be priced at Rs.110 if it were made of beef, and made to be identical to an American burger. Still, this would implie that the currency is under-valued. So given that India doesn’t really have an export driven economy, why, then, would the Indians devalue their currency in this way? What do they have to gain? India has a trade *deficit*, and they have a lot to gain by strengthening their currency.
Good thinking…but, I guess there is a difference in perspectives. My view is that there is a big craze in India for anything American, Gap jeans are considered designer (or quasi designer)…McDonald caters largely to the middle class (maybe even upper middle class). Going to Mc is considered a fun family outing/hang out place for kids, unlike the US. Pizza huts are a nice sit down restaurants In both Mc & pizza hut, the quality of service, people employed, cleanliness and food quality is …in my view far better than what we have here. (I guess that’s again because they are targeting a different market segments). For the above mentioned reason, Rs 99 ($2.55) also includes that premium. On a second note, Indian Rupee is fairly free floating; The Rs has appreciated nearly 19% in the last 3-4 years. Part of that 19% is obviously dollar driven and the rest reflects its strong economy and also the increasing share of world’s capital investment that India has been attracting. I don’t know how the Rs have faired against the Euro. One possible cap for further appreciation of Rs might be the high inflation rates in India (roughly 6%).
Hmm… where to begin? First of all… the Big Mac Index is supposed to be a crude index attempting to make loose claims on LONG-TERM movement in the currencies. The exchange rate equilibrium is created by supply and demand to meet purchases of traded goods and capital flows. The cost of a Big Mac (or maharaja mac in india) includes costs such as rent and labour that are not easily tranferrable across national borders. The long-term convergence concept (of the cost of a Big Mac converging) is based on the macroeconomic theory that in the long-run, nations with different levels of income will find their income (to labour and capital) converge in the long run if they trade with each other. Second, if you observe an indian bazaar for about 2 hours you will learn two simple economic lessons. One, when there is an abundant supply of labour, the price of labour will be low, while when capital is scarce, the cost (or rewards) to capital will be great. Two, in a situation in which labour is cheap and capital expensive, you will find a high level reliance on labour and low levels of capital implementation, while on the flip side, you will find people trying much harder to leverage their capital for income instead of trying to compete in the labour market. (I’m referring to the tons of little shops with at the most 2,000 Rps worth of goods and maybe a dozen customers an hour that I personally have seen all over India. This indicates to me… that even with this little amount of business, it’s worth it to them to engage in this business than to offer their labour on the labour market). My point being… in India, if you go to a restaurant, Micky Dee’s or otherwise, you probably have a greater reliance on labour in the production process (from transport, packaging, production, and service) and this labour is unbelievably cheap compared to that in America. Therefore… until the levels of income in the two countries converges, the Big Mac Index will alway show the Rupee as undervalued. I wrote this in a hurry… so my apologies for any confusing syntax, etc.
Ditto on the big mac index being a very crude indicator of purchasing power parity. These kinds of indicators are fun to look at, but it’s definitely a VBI (very bad idea) to use any single item price to compare currencies (except possibly the price of government debt in that currency). In India, Big Macs have special considerations too. A very large proportion of the country is vegetarian for religious reasons, and of the remainder, an enormous proportion won’t eat beef. So Big Macs are made from mutton, which means that the Big Macs aren’t as comparable as they are in most other countries.
A big mac costs Rs 65 ( not 99 ) in India… the site is probably not updated… So then according to the above logic the INR USD rate should be 19.06 not 40
This arithmetic does not take into account a very important factor: productivity. Add that in and you may get a different story.
So how do they sell Big Macs in India anyway? I thought it was illegal to slaughter cows in India. Do they bring in frozen hamburger from some godless place like Diego Garcia? Maybe Big Macs in India are more like Indian soylent green than American Big Macs…
They’re mutton burgers (seriously).
See?! There we go. You can’t use PPP to compare mutton burgers with hamburgers. If they served Big Mutts in McD’s in the US nobody would pay even $2 for one. Maybe the rupee is overvalued.
Nope, cow slaughter is not illegal in India. The Christians and Muslims are the top consumers of beef, as are the Mongoloid people in the North-eastern states of India. Its purely market economics that MacD will not sell a beef burger in India as they may lose the large middle class consumers who are mostly Hindu. In fact, most McD in India are a vegetarian’s paradise in terms of food choice, unlike US.
Maybe you should use French Fries to do your PPP calculations?