The Big Mac and the Dollar . . .

Economic Tidbits 12.18.17

“The Big Mac and the Dollar” may read a bit like the title of a children’s fairy tale (i.e. Jack and the Beanstalk), but it isn’t.  Instead, it’s an agricultural economist’s not-so-clever way of introducing a discussion on the value of the dollar.  Nebraska agriculture relies on exports, and the value of the dollar is a key determinant in determining the competitiveness of Nebraska agricultural products in international markets.

The Economist magazine created the Big Mac index as a way of measuring the value of the world’s currencies relative to the U.S. dollar.  The Economist states, “The index is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same in different countries.”  The basket of goods chosen by the magazine to compare across countries is a McDonald’s Big Mac.  The cost of the hamburger in different countries is converted into U.S. dollars and the local cost compared to average U.S. cost to determine the relative value of each currency.  Countries where the hamburger costs more compared to the U.S. have currencies more expensive than the dollar; and countries where it costs less have currencies less expensive relative to the dollar.

The Economist found the average cost of a Big Mac in four U.S. cities was $5.28.  According to the index, the cost of a Big Mac in Switzerland, Norway, and Sweden is greater than the cost in the U.S., thus these countries’ currencies are more expensive relative to the U.S. dollar.  In all other major countries, particularly in some major agricultural competitors (i.e. Canada, Brazil, Australia, and Russia) the Big Mac costs less, indicating a currency cheaper than the U.S. dollar.  Based on the index, the value of the dollar remains high but the gaps between the dollar and other currencies narrowed since the last time The Economist calculated its Big Mac index, a positive sign for U.S. exports.

Big mac and dollar

Most observers believe the U.S. dollar will continue to drop in value through 2018.  Economic growth in other countries is relatively strong, putting upward pressure on other countries’ currencies.  Also, the dollar continues to remain relatively high historically, suggesting its due for a correction.  All in all, a continued decline in the value of the U.S. dollar in 2018 should work to support growing U.S. agricultural exports.  (The big Mac index: The Mac strike back, the dollar’s decline is a small victory for burgernomics, The Economist, Jan. 20th, 2018.)
Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.

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