Headlines often claim that the Ukrainian hryvnia is undervalued based on the Big Mac Index. But is this really true?
The Big Mac Index was created by The Economist in 1986 as an indicator for comparing the purchasing power of currencies by the price of a Big Mac burger in different countries. For instance, if a Big Mac costs $6 in the USA and just over $3 in Ukraine, it ostensibly suggests the hryvnia is undervalued.
The index is based on the idea of purchasing power parity (PPP): for the same sum of money in different countries, one should be able to buy the same basket of goods. However, measuring a wide range of goods is complex, so the Big Mac was chosen as a simpler option.
But the price of a Big Mac depends not only on ingredients but also staff wages, rent, taxes, utilities, and more. These factors can vary greatly between countries and even within one country.
McDonald's also adjusts pricing to each market. In some countries, a Big Mac is positioned as a premium product; in others, it's the cheapest item. The recipe may also change, such as in India where beef is not used for cultural reasons.
A currency’s exchange rate mostly depends on supply and demand. High demand for Ukrainian goods and services increases demand for hryvnia, which can strengthen its rate. The Big Mac Index, however, doesn't account for intellectual labor or services exports, which are increasingly important in modern economies.
Even within one country, prices can vary significantly. Therefore, using only the Big Mac to judge an economy’s status is inaccurate.
In sum, the Big Mac Index is more of an economic curiosity than a crucial indicator of a currency's or country's real value.
