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Jake Van Der Kamp

The Hong Kong dollar and the yuan are the most undervalued currencies in the world, trading at discounts of 40 per cent or more versus the US dollar, based on the relative cost of Big Mac hamburgers.
SCMP, April 26  
What a brilliant marketing gimmick The Economist magazine devised in the Big Mac Index. It may be economics on the cheap and a touch superficial but, hey, the whole world knows two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun.
I remember having one once. I remember it because my stomach complained about it for hours after. That's the hamburger, I mean. It would take a good deal more to make me the swallow the Big Mac Index.
The basic idea is not a bad one: choose something sold round the world and virtually identical wherever it is sold. 
Now, note down the prices at which it is sold in different locations, translate these prices into their US dollar equivalents and you have a measure of whether different currencies are overvalued or undervalued relative to the US dollar.
Well, it's the same hamburger wherever you go, isn't it? The only difference is the currency with which you buy it. 
Therefore any difference in the price must tell you something about whether those currencies are properly valued against each other. You should be able to make some money playing currencies with the Big Mac Index.
Except that you can't. Ever since The Economist  started publishing it, Hong Kong has had the cheapest Big Mac in the world - US$1.90 at the latest count - and Switzerland the most expensive - US$6.78. It doesn't make the Hong Kong dollar go up and it doesn't make the Swiss franc go down.
What it does do is what I imagine it was intended to do, which is sell more copies of The Economist. This makes it a brilliant sales idea, not a breakthrough in measures of purchasing power parity.
But why doesn't it work?
Let's start with another measure: housing prices. For our benchmark in Hong Kong we shall take a  mid-range 550 square foot flat in  Sha Tin. We'll adopt government figures here and set the price at HK$5,110 a square foot, which puts the value of that flat in US dollar terms at US$362,000.
Next, we turn to the United States where the most recent figures from the Office of Federal Housing Enterprise Oversight   put the median price for a home across the entire country at US$135,200.
Now isn't that interesting? The Big Mac Index says the Hong Kong dollar is worth only about half of what it should be - US$1.90 for a Big Mac here versus U$3.71 in the US. 
Our House Price Index, however, says the Hong Kong dollar is worth almost 2.7 times what it should be - US$362,000 for a house here compared with US$135,200 in the US.
It's not a fair comparison, you say. An average home in the US is very different from one in Hong Kong in size, in market dynamics and in the contrast between flats and stand-alone structures. Big Macs are the same everywhere. Homes are not. 
 I'm not so sure. 
In the first place, everyone needs a home. No one really needs a Big Mac. 
A home is also a big item of expenditure and you think long and hard before buying one. You'd have to chew your way through 190,000 Big Macs to eat the equivalent of a Sha Tin flat. No, don't.
 And while a Big Mac may be identical across the world in appearance, it is not identical in the cost of the inputs. Try wages. Switzerland does not have a minimum wage but the lowest figure I could find, 2,200 Swiss francs a month, is the equivalent of more than HK$18,000. What McDonald's burger slinger in Hong Kong is paid that much?
Then you get government subsidies of inputs. We have little in food subsidies in Hong Kong while the US has  a lot, but we do benefit from mainland subsidies. 
Hong Kong McDonald's outlets have always been known to source their inputs at low costs. They also have low transport costs as the distances are short and their  high sales figures per store help restrain storage costs and rental costs.
It's still a notable achievement for them to keep the price of a Big Mac as low as it is here but it is not a miracle and it tells you more about the commercial efficiency of the McDonald's operations in this town than it does about the Hong Kong dollar.
But then I've never thought purchasing power parity measures as important as the hard bid/offer of any foreign exchange trading desk. The Big Mac Index sells subscriptions. Don't ask more of it.



Big Mac price comparison figures hard to swallow