How much burger do you get for your euro, yuan or Swiss franc?

Today's Economist includes the latest Big Mac Index, a crude but quite effective indicator of relative purchasing power. It implies that the British pound is overvalued by about 12% and the Euro by 17% relative to the greenback. Even stronger imbalances are reported for the Swiss franc (+65%), the Danish krone (+50%) and Swedish krona (+36%).

Our index shows that burger prices can certainly fall out of line with each other. If he could keep the burgers fresh, an ingenious arbitrageur could buy Big Macs for the equivalent of $1.27 in China, whose yuan is the most undervalued currency in our table, and sell them for $5.05 in Switzerland, whose franc is the most overvalued currency. The impracticality of such a trade highlights some of the flaws in the PPP idea. Trade barriers, transport costs and differences in taxes drive a wedge between prices in different countries.

More important, the $5.05 charged for a Swiss Big Mac helps to pay for the retail space in which it is served, and for the labour that serves it. Neither of these two crucial ingredients can be easily traded across borders. David Parsley, of Vanderbilt University, and Shang-Jin Wei, of the International Monetary Fund, estimate that non-traded inputs, such as labour, rent and electricity, account for between 55% and 64% of the price of a Big Mac.

Here is the table:
UPDATE: David Tufte of VoluntaryxChange cites an alternative Big Mac index. Published by Asian Labour News last year, it it converts the value of the Big Mac into the actual time it would take a typical employee in that country to earn one. Now a little dated, but conceptually the idea has merit.

This reminds me of the biennial International Metalworkers' Federation report which provides an international comparison of metalworkers' average earnings, expressed by the working time required for the purchase of a wide range of selected consumer items. See Purchasing Power of Working Time 2004 (PDF).

Comments

[Edward Hugh]

This index is really interesting. On the euro, I had been playing in my head with 1:1 USD:euro as a realistic rate to aim for. Well, if we take the presnt value of the euro at about 1.22, and we devalue by 17%, we get 101.26. By Xmas maybe? It goes without saying that I don't swallow any of the 'dollar crash' stories.

[McGroarty]

Have state sales taxes been included? What about the VAT, which is baked into prices?