Big Mac Index: Why the price of the famous hamburger reflects the slowing economy and the lack of confidence in the country

With the free exchange rate at $ 185 and even with an official dollar value close to $ 100, economists, consultants and even government officials agree: Argentina is “gifted”, although this competitiveness is not fully reflected in the trade balance or in tourism income, due to the internal economic crisis and the pandemic.

To this reading was now added The Economist updating in June, as every year, the “Big Mac Index”, which measures whether a country’s currency is under or over-valued according to the dollar price at which the most traditional sandwich is sold (alone, not in a “combo”) of the chain of golden bows.

Foreign exchange market and Big Mac index indicate Argentina is ‘given’, but does not inspire confidence

The index is based on the theory of “Purchasing Power Parity” developed in the 19th century by the Swedish economist Gustave Casel. According to her, one currency is “aligned” with another if it allows the purchase of the same basket of goods at the same value, expressed in one or the other of the two currencies. The “Big Mac Index”, by taking a good which must be identical everywhere in the world, makes it possible to test the theory in a simpler way than using price indices based on different consumption baskets.

Thus, the Argentine peso will be “aligned” with the dollar, if the Big Mac costs, in dollars, the same here as in the United States. Well, according to the prices collected by The EconomistIn Argentina, the Big Mac cost an average of $ 380 in June (today, in the local city of Buenos Aires, it is priced at $ 390), which, translated into the official dollar value ($ 96.33) , implies a price of $ 3.74, compared to $ 5.65 in the US. To even out prices, the exchange rate in June should be $ 67.26, which according to the popular index implies that the Argentine peso is “undervalued” by 30.2%, a percentage that should be lower the domestic price of the dollar. . And if you take the free $ 185 dollar course this Friday morning, the “undervaluation” is no less than 64%.

Far from this trend, the dollar has appreciated strongly over the past month and persistently over the past two weeks, after another rebound on the “equities” exchange, with which the BCRA and the CNV sought to tame “cash with liquidation”. but they fueled the “blue” price. In short, the forex market and the Big Mac index indicate that Argentina is “given”, but does not inspire confidence, so the dollar continues to rise, unlike the underlying problem, the loss of value of the peso. .

So, for example, a report by Torino Economics said that although in the first quarter of the year Argentina benefited from a relative “exchange rate”, the situation began to change. “It is possible – observed the New York-based consulting firm – that from this July, a increased pressure on the foreign exchange market, with the danger of widening the gap between official and parallel exchange rates, thus threatening price stability ”.

The slide in devaluation and inflation in Argentina is reflected in the Excel spreadsheet data for the last 5 years, after which The Economist does the “Big Mac Index.”

For example, a year ago the Big Mac cost $ 250, which at the official price at the time was $ 3.51, which means that in 12 months the sandwich has increased by 52%. in pesos and 6.6% in dollars. As of July 2019, the sandwich cost $ 120 and $ 2.87. And in July 2016, 5 years ago, $ 50 and $ 3.35.

Regarding the impoverishment implicit in devaluation and inflation rates, The Economist specifies that 5 years ago Argentina’s per capita GDP, in “purchasing power parity”, was $ 13,589, fell to $ 14,588 in mid-2019 and has since plummeted: $ 11,658 per capita in 2020 and to $ 8,855 today. That is almost 40% less in two years.

As in every edition, the most recent Big Mac Index shows extreme cases of undervaluation and overvaluation. The most expensive Big Macs in the world are those of Venezuela (where it is not available), Switzerland, Norway and Sweden, which are said to be the most overvalued currencies in the world. The cheapest is the one available in Lebanon, where at $ 1.68 it costs almost a fifth of what it costs in Switzerland.

According to the index, in South America, not only the Argentine peso is undervalued. The same goes for the Chilean peso (32.3%), the Brazilian real (22.8%) and the Uruguayan peso (9.5%). Thus, if the “blue” exchange rate is taken as a benchmark for Argentina, the 64% undervaluation of the Argentine peso is three times that of the Brazilian real, more than double that of the Chilean peso and almost nine times that of the Brazilian peso. that of the Uruguayan Peso.

The Economist began publishing the “Big Mac Index” in 1986. In each update it refers to a current international trade or economic policy issue. In the edition published yesterday, he points to the tug-of-war between the United States and Vietnam, a country that the United States government accuses of undervaluing its currency, the Dong, to “unfairly” increase its competitiveness in the North American market. But Washington also blames Switzerland and Taiwan, where the Big Mac is more expensive than in the United States.

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