Big Macs, Subatomic Particles, and Unintended Consequences

By Grant Bosse on May 3, 2012
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At Slate, Matt Yglesias has a fascinating post on why Big Macs in Argentina are much cheaper than you’d expect, and much cheaper than they should be.

Well, it’s all a sordid tale of capital controls and fuzzy math. Some time ago, Argentina defaulted on its debt and ever since Argentine households are inclined to hold a substantial share of their savings abroad in foreign-denominated assets. But the Argentine government wants to limit capital flight so they’ve put curbs on how much foreign exchange an Argentine can buy. This in turn has led to a dual exchange rate system. Officially, a dollar is worth about 4.2 pesos. Unofficially, you can get more pesos for your dollar on the black market. Hostile press reports I’ve read suggest the black market rate is 5 pesos to the dollar. In practice, I wasn’t able to get a deal that good from either of the people I traded under the table with but still I got a substantial discount vis-a-vis the official rate. But the real state of Argentina’s currency is visible in the rising price level, since the country engages in a lot of trade. The government, however, insists that the inflation rate is considerably lower than independent observers say. The Big Mac Index is one well-known international check on government number-fudging, and the Economist’s editorial line is very hostile to the kind of populist economic policies Cristina Kirchner has pursued, so the government knows it’s vulnerable to the wrath of the index. To that end, the Argentine state leaned on Argentina’s McDonaldses to exercise restraint in their Big Mac pricing. That, in turn, has led the McDonaldses to radically de-emphasize the suddenly non-profitable signature sandwich in favor of the Triple Mac and other offerings.

So much like subatomic particles, the price of Big Macs changes when it is being observed. Now that the Big Mac Index has become a commonly used tool to measure true purchasing parity across the globe, governments are trying to game the system to shield their inflationary economies. Of course, the Big Mac Index itself was designed to see through currency manipulation and other tools that governments use to hide inflation.

That doesn’t mean we should stop measuring the price of Big Macs. We just have to know what we’re measuring.

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