Recently, I came across this short article by Amit Klein, comparing the costs of “living very well” in New York versus Mumbai (India). Its an interesting comparison based on his experiences so far in Mumbai and does err on the high side. In one of the comparisons, he compared the price of the Big Mac in the two cities, which got me thinking whether his comparison could be tweaked to account for Purchasing Power Parity (PPP) using the Big Mac Index.
For the uninitiated, the Big Mac Index is a humorous take by the Economist on PPP, which contends that the PPP adjusted exchange rate can be determined by the price of the Big Mac in any two countries. The general idea is that the Mac being standardized should cost the same anywhere in the world, all things being equal. To get the Big Mac rate we divide the price of the burger in one currency by the price of the burger in other currency. For example, Amit quotes the price of the Big Mac as Rs. 65 in India and $2.50 in New York. So the exchange rate applicable should be 1 USD = INR 26. Using this rate, I have recomputed a table of prices that Amit presented.
Price Comparison - Mumbai Vs NYC
The results are pretty interesting. First thing I noticed is that while the Indian prices are cheaper, the stark difference in prices is reduced. I would expect this, because the Indian city used here is Mumbai, definitely one of the more expensive places to live in India. Secondly the prices of some items, namely Levi’s Jeans and T-shirt’s, are actually more expensive here. I haven’t been able to fathom why this should be so, but maybe its because of the enormous premium branded goods command here in some segments.
To conclude this little experiment in burgernomics, I’d say this definitely throws up some food for thought.
Reza says:
If you assume the pricing mechanism of Mcdonalds to be based on perceived value then you argument holds true.
July 11, 2009, 8:39 amBut if Mcdonalds uses the cost plus margin which remains the same across the world, your argument will not be completely correct cause the ingredients cost will be different at different places.
It is an intriguing idea, and maybe a clue in the long term direction of the dollar!!
Mohanjeet says:
Regarding Levi’s, Nike, Adidas and the like… i guess there’s a difference in positioning. 🙂
July 17, 2009, 3:11 am