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The Curious Case of the Cheap Big Mac

19 Dec
McDonald’s Menu: Note the McCombo Big Mac Price. The $ sign denominates Argentinian Pesos

McDonald’s Menu: Note the McCombo Big Mac Price. The $ sign denominates Argentinian Pesos

Walk into a McDonalds in Argentina and you’ll be struck by two things. One is plain to see. The other involves a rather keener eye.

The first is the prices. At an average of $45 pesos (€6.92) for a regular meal, they are slightly more expensive than the equivalent meals in restaurants in America, Britain or Ireland. Considering the average wages in Argentina are about half what they are in my home country Ireland, and the frequency of the American food chain is far above any country in Europe, this is a surprise.

If you resist the urge to splash on one of the meals in bright colours above the checkouts, and instead observe the prices in the full-menu written in small writing to the side, you’ll notice a peculiarity.

The McCombo Big Mac Meal, as it’s called here, is $29 pesos, a full $16 pesos cheaper than most meals on the menu. Since it’s not advertised, and rather hidden away, it’s obvious to assume this isn’t a special offer and is most certainly odd.

Big Mac meals are cheaper than other McDonald’s meals in Argentina

Big Mac meals are cheaper than other McDonald’s meals in Argentina

The reason for both involves an understanding of the economics of Argentina. Due to import restrictions and spiralling inflation (the Government claims it is 10% per year, most economists scoff at these figures and claim it is at least 25%), the price of certain goods in the South American country is above that of developed countries in Europe and North America, at least when you compare the official exchange rate. Hence the explanation of peculiarity number one.

Peculiarity number two is a way to hide the reality of peculiarity number one. Economists at ‘The ‘Economist’ magazine have devised a rather novel way of comparing purchasing power parity (PPP) throughout the world. They compare the price of Big Macs in McDonalds. If the price of a Big Mac goes up in one country but not another, this is an indicator of the strength of one currency against the later and the fluctuations year-on-year can measure inflation as well.

The Big Mac Index, invented in 1986, is by The Economists magazine’s own admission not the most scientific index for measuring PPP, as discrepancies exist in various countries to what value is placed on a Big Mac. For example, McDonald’s is viewed as exotic “Western” food in some developing countries, while in many others it is cheap junk food. Also there are potentially higher costs in certain countries of sourcing necessary raw materials, while lower labour costs means lower prices.

Nevertheless, it is a respected index which has shown up some truths over time, like the overvaluation of the euro when it first entered the market.

According to the index, in January 2013, Argentina’s currency was undervalued by 12.6% against the US dollar, although it’s black market dollar price rose to US$7 in January (it has since risen to to over US$9). The country most similar to Argentina in term’s of discrepancies between the ‘official’ dollar rate and the black market rate, Venezuela, has an overvaluation of 107.9%.

The above figure is the ‘raw index’ figure. When adjusted to GDP per person =, ie take the average income of a person in that country and predict the price, the peso is overvalued by 33.4%.

The Big Mac Index (2010 figures).

The Big Mac Index (2010 figures).

‘The Economist’ magazine hasn’t minced its words when it comes to Argentina and the Big Mac Index. “Burgernomics does support claims that Argentina’s government is cooking the books. The gap between its average annual rate of burger inflation (19%) and its official rate (10%) is far bigger than in any other country,” it said in 2011.

If true, it leads to two obvious questions. The first is why McDonald’s allowing the Argentinian Government meddle in its pricing? The second is why are Argentinian authorities so desperate to keep the PPP rate low?

The answer to the first question is, presumably, based on profit. If it refused to comply with the Argentinian Government’s request, things could be made more difficult for McDonald’s in Argentina. A McDonald’s spokesperson told Argentinian daily, La Nación, that claims of cooking the books were false, the cheaper price on the Big Mac was a “marketing strategy”. Evidently a long-term one, because the representative made those remarks in April 2011.

With regards to the second question, the answer lies in the level of trust Argentinian citizens have in their currency. Most remember the days their savings were obliterated by default and hyperinflation in the 1990s and early 2000s. As a result, capital flight (ie moving your savings into a more stable currency like US dollars or euros instead of Argentinian pesos) is a major issue, so the Government has set in place limits of the amount of money that can be taken out of ATMs per day, restrictions on exchanging currency, as well as moving money in and out of the country. Keeping the PPP rate of the Argentinian peso against the US dollar relatively artificially low prevents potential panic, meaning a more stable currency. That’s the theory anyway.

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Posted by on December 19, 2013 in Uncategorized

 

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