The Big Mac, Olivier, and Borscht Indexes: How Prices Are Compared Across Regions

These indexes provide intriguing yet sometimes misleading figures.

The Economist magazine recently updated the Big Mac Index, naming the Russian ruble the most undervalued currency globally. According to the index creators, the ruble's exchange rate should be 23.24 rubles per US dollar. However, at the time of the article's publication, it exceeded 76.6 rubles.

This disparity raises questions about the index's reliability and the role of the Big Mac in currency comparisons.

What Is the Big Mac Index?

The Big Mac Index is a creative method to estimate purchasing power parity (PPP) between countries, based on the price of the same product — a Big Mac burger — in different currencies.

Purchasing power parity reflects the relative value of currencies by comparing the cost of identical goods and services across regions. Though it sounds complex, the Big Mac Index simplifies this concept using a familiar example.

Initially, the index was introduced humorously by The Economist's author Pam Woodall, who explained currency markets by comparing the price of a Big Mac worldwide.

For instance, if a specific basket of goods costs $100 in the US and 5,000 rubles in Russia, the exchange rate should ideally be 50 rubles per dollar. Otherwise, one currency is considered overvalued or undervalued.

Woodall chose the Big Mac because McDonald's operates in most countries. The burger includes diverse ingredients such as meat, vegetables, bread, and cheese, sourced locally, minimizing price distortion from transportation costs. Thus, dividing the Big Mac price in one country by that in another, using their local currencies, provides an estimated fair exchange rate.

Why Use the Big Mac Index?

While the index is insightful, it lacks practical application for precise currency valuation. For example, in April 2000, a Big Mac cost 39.5 rubles in Russia and $2.51 in the US. The implied exchange rate was 15.74 rubles per dollar, yet the actual rate was 28.5, indicating the ruble was undervalued by 44.8%.

By July 2021, the burger-based calculation suggested the dollar should be 29.91 rubles, not 74.53. The ruble ranked as the second most undervalued currency globally, trailing only the Lebanese pound. Conversely, only four currencies were overvalued: the Norwegian and Swedish krona, Swiss franc, and Venezuelan bolivar.

Currently, the Big Mac costs $8.81 in the US but only $1.77 (about 135 rubles) in Russia, placing the ruble at the bottom of the index alongside the Turkish lira and Indonesian rupiah.

For everyday consumers, this data is mostly theoretical — a fun way to imagine living in a world where Big Mac prices set exchange rates instead of central banks. It also offers a glimpse into how confidently other currencies perform, though the index isn't ideal for predicting currency movements.

The ruble’s persistent undervaluation hasn't translated into strengthening; instead, it slipped from mid-ranking to the lowest position in the index.

Limitations of the Big Mac Index

Though the index offers a playful way to compare living costs, several factors limit its accuracy:

• McDonald's locations are scarce or nonexistent in some regions, such as much of Africa.
• The Big Mac's composition varies; for example, in India, where cows are sacred, the burger is made with chicken and renamed.
• In some countries, McDonald's is affordable fast food; in others, it is a premium dining experience, making price comparisons less meaningful.
• The Big Mac price includes not just ingredients but also labor, transportation, taxes, marketing, and other costs, which vary widely.
• McDonald's pricing strategies differ by country, so prices aren’t standardized globally.
• Within a country, prices may be similar across cities, but average incomes can differ significantly, limiting the index's reflection of real purchasing power.

Ultimately, the Big Mac Index tells us mostly about the burger's cost itself. Nevertheless, its catchy name and simplicity make it popular among economists and journalists to illustrate concepts like purchasing power parity.

Other Food and Product-Based Currency Indexes

Several other indexes have been developed to compare currency values and living costs using different products.

The Latte Index

In 2014, The Economist proposed the Latte Index, using the price of a standard Starbucks latte instead of a Big Mac. Various companies continue to calculate this index, though it involves even more complexities.

In 2021, the analytics firm ValuePenguin combined latte prices with consumer price data and exchange rates. They found lattes are more expensive worldwide than in the US, especially in Russia. Adjusted for local conditions, a latte in the US would cost $12.32 if priced like in Russia, compared to the actual $2.75 — a fivefold difference.

Analysts attribute this to Starbucks being viewed as a luxury brand in Russia and many developing countries, unlike a simple coffee shop.

The iPod and iPhone Indexes

Though not food, gadgets have been used as product comparators. In 2007, Australia introduced the iPod nano index, based on the idea that electronic devices should cost roughly the same worldwide since production and shipping costs are relatively uniform.

However, shipping costs vary, and volume discounts affect prices, limiting the index’s accuracy. Later, the iPhone replaced the iPod in these analyses.

Today, the iPhone index compares the phone's price to average wages across countries, estimating how many working days are needed to afford one if all earnings are spent on it. In Russia, an iPhone costs about 42.1 working days, with only seven countries requiring more days.

Critics note the index uses official average salaries before taxes, which may not reflect actual earnings or median income, raising questions about its precision.

The Olivier and Herring Under Fur Indexes

These indexes, calculated by Russia's Federal State Statistics Service, track the cost of traditional holiday salads — Olivier and Herring Under Fur — across Russian regions.

Unlike currency indexes, these focus purely on food prices year-over-year to measure inflation and price changes of specific products.

In 2020, the cost of ingredients for Olivier rose by 6.14% to 5.50 USD (converted from 386 rubles), and Herring Under Fur ingredients increased by 7.4% to 2.41 USD (from 169 rubles).

Indexes for Okroshka, Borscht, and More

New indexes continue to emerge, comparing prices of ingredients for popular dishes like okroshka and borscht. These indexes primarily raise questions about regional price differences rather than provide definitive answers.

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