The Big Mac Index is one of those funky things in the world of economics that a lot of people think they know about it, but they actually do not. The New Straits Times on Saturday featured the  Index in a big way to show that Malaysia has the third cheapest Big Mac in the world.[1] Unfortunately for the newspaper, in doing so, it proves to the world that they do not know what the Index is about. And they did that in a grand style, by putting it on the front page.

The Big Mac Index by the Economist does have a list of Big Mac prices from a number of countries. But the point of the list is not to aid burger hunters searching for the cheapest Big Mac in the world. Rather, the point is to give the readers a feel of how overvalued or undervalued a currency is, typically against the US dollar (these days, the Economist has introduced multiple other reference currencies).

The Index is designed to demonstrate a theory called the purchasing power parity. The PPP, although not exactly the Law of One Price, pretty much operates on the same logic the Law of One Price operates. If the PPP holds in the world of Big Macs, then all Big Macs would cost the same. When there is divergence in prices between two… national… burgers, then it suggests that either one or the other is overvalued or undervalued.

So, if Malaysia does have the third cheapest Big Mac in the Index, what the Index is telling you is that the ringgit is the third most undervalued currency in the Index (against the US dollar, the reference currency).

The NST seized on the word cheapest to give an idea that it is cheap to live in Malaysia. “Malaysia has been ranked one of the cheapest places in the world to purchase a Big Mac,” goes the very, very bad article. In a companion article that is equally awful:

Independent economic macro-analyst Prof Dr Hoo Ke Ping said while it was true that some might find prices of food items to have risen somewhat, Malaysians should be thankful that they can still enjoy relatively cheap meals compared with other countries.

He said the Big Mac index was proof that essential items in the country were still relatively cheaper than other countries.

“Although some prices of food items, petrol and electricity have gone up, our prices are still cheap.”

Hoo said it was a misconception that prices of essential items had gone up, adding the speculation was sensationalised, over-hyped and not fully defined. [Big Mac index an accurate indicator. New Straits Times. February 15 2014]

You get the idea what the NST is trying to say. It is really a propaganda hack and not actual news. NST itself has no understanding of the Index, much less of the PPP. It does not care about the economic rationale behind the Index. NST is only forcing the economics to fit into the paper’s preferred narrative, which is horribly flawed.

As for the professor, I present to you, a big chart of the monthly YoY changes of all of the major components of the consumer price index throughout 2013:

big ass chart

Please do not tell me that the prices of essential goods have not gone up (no, I am not referring to the alcohol and tobacco component although I do understand, those are essential items for some people. For the majority, look at the rising food and more jarringly, transport inflation).

Now, it may or it may not be cheap to live in Malaysia but using the Index to demonstrate that is just not the way.

To make that argument on living cost, you need to make at least one more step and that is to find the income of the median Malaysian. From there, you can calculate just how many burgers that Malaysian can buy with his or her salary. Compare that to the same metric in another country and only then you can say whether it is cheap to live in Malaysia.

The way the reporter writes it, it is cheap to live in Malaysia if you earn in stronger currencies like the US dollar, which is true and you can definitely know that from the Index.

But most Malaysians do not earn in dollar. That fact really makes the NST’s argument irrelevant.

Finally:

Accountant Muhammad Aiman Sofian said lower salary levels in Malaysia meant that the ratio of expenses to income was smaller compared with other countries. [Big Mac index an accurate indicator. New Straits Times. February 15 2014]

You have got to be kidding me… that just goes against empirical evidences from all around the world.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR: MALAYSIA has been ranked one of the cheapest places in the world to purchase a Big Mac, according to The Economist.

The British news magazine’s annual “Big Mac” Index, which gauges if global currencies are at their correct level, has ranked Malaysia third behind India and South Africa as the cheapest place in the world to purchase the McDonald’s signature burger.

“The price paid for a Big Mac in Malaysia is RM7.40, which is equivalent to US$2.23 when converted using the global exchange rates.

“This amount is lower when compared with the actual price of a Big Mac that is sold in the United States for US$4.62, indicating a 50 per cent difference.

“In other words, the Big Mac sold in Malaysia is half the price of the same burger sold in the US,” the magazine revealed.[Malaysia is 3rd cheapest place to buy a Big Mac. New Straits Times. February 15 2014]

One Response to “[2726] The Big Mac Index is not about cheap burgers, NST”

  1. on 18 Feb 2014 at 13:22 Shahrul

    Bro,
    Hardly ANYONE (I know – qualifying remarks TQVM) reads the NST, so it pretty much writes to cater for the following:
    i. Reporter, so that the daily quota of a news item is filled
    ii. Assistant News Editor, thus filling the pages that still needs filled despite shrinking (non-existent?) readership
    iii. Editor, to justifying nagging no i and ii
    iv. Owner, to strut along the tunes of James Brown’s “I feel
    good”.
    Wondering where the “reporter” gets all these brilliant fellas to allow themselves to be so shamelessly quoted verbatim.